Earnings Call Transcript - TEAM Q3 2025

Operator, Operator

Good afternoon, and thank you for joining Atlassian's Earnings Conference Call for the Third 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 third 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 a shareholder letter and press release with our financial results and commentary for our third 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 our other earnings related materials, including the earnings press release and supplemental investor 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. 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. 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 may also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. 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 delivered total revenue of $1.4 billion in Q3, driven by cloud revenue growth of 25% year-over-year and a free cash flow margin of 47% for the quarter. We continue to make great progress in our strategic priorities of serving the enterprise, making rapid advancements in AI, and connecting technology and business teams through the Atlassian System of Work. Earlier this month, we held our annual user conference, Team '25. Over 5,000 customers, partners and Atlassians gathered in Anaheim as we ushered in the next evolution of the System of Work, drove Rovo's incredible AI capability to the center of the Atlassian platform, introduced two new cloud offerings, and much, much more. Team is always such an energizing moment for me and all Atlassians as we get to see the reaction from our customers and partners to the incredible innovation that we're delivering and hear firsthand how they're using our solutions to transform the way they work. The next evolution of the Atlassian System of Work is officially here as we've started making the shift from standalone products to a vision of apps and agents with Rovo at the center of everything. By making Rovo included in all premium enterprise subscriptions of Jira, Confluence and Jira Service Management, with the standard edition soon to follow, we're democratizing the power of AI and accelerating human-AI collaboration. We already have over 1.5 million monthly active users of AI across our platform, and we expect this number to continue to grow strongly week-on-week as we roll out and as more customers realize the power of Rovo's capabilities. If you'd like to hear more about how this sets us up to win in the AI era, check out the Loom that I just posted to our IR website. We continued to also make steady progress towards unlocking the Atlassian Cloud Platform for even more of our largest and most complex customers as we achieved FedRAMP Moderate authorization for our U.S. federal government customers and their industry partners. We expanded our cloud platform with the Atlassian Government Cloud and also announced our Atlassian Isolated Cloud, a single-tenant cloud solution for enterprises with highly sensitive data. All up more than 300,000 customers, including Mercedes, SAP, Workday and Xero rely on Atlassian to help their teams work better together and unleash enterprise knowledge across their organizations. We believe the progress we're making on our key strategic priorities will continue to fuel durable long-term growth and help us scale to $10 billion in revenue and beyond. With that, I'll pass the call to the operator for Q&A.

Operator, Operator

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

Sanjit Singh, Analyst

Yes. This is Sanjit Singh for Keith Weiss. Thank you for taking the questions and congrats on the 1.5 million in AI monthly active users. I wanted to talk about some of the decisions of the business, Mike, that you're making. One being sort of embedding Rovo into the core products and that being potentially a trade-off in sort of near-term revenue growth. When we think about that maybe in relation to the mid-term outlook of sort of 20% CAGR, does that sort of move the needle from that perspective? And then when you think about some of the uncertainty in the macro, does that also sort of cause the team to reassess that 20% growth outlook? Thank you.

Mike Cannon-Brookes, CEO

Sure, I can address that. Joe might want to add his thoughts later. The decision to integrate Rovo into our core products is resulting in ongoing growth and increased adoption of Rovo and our AI features. We've surpassed 1.5 million monthly active users, and this number continues to rise significantly. Sales of our premium enterprise editions have increased by over 40% year-on-year. Cloud customers using Rovo agents in thousands of unique workflows are finding substantial value. From this strong position, we feel confident about the capabilities we've developed and aim to provide them to as many users as quickly as possible. By maximizing usage and adoption, we believe we have a substantial opportunity for user expansion, both through additional features and expanding to more knowledge workers in organizations. This approach aligns well with our overall software development strategy. We are very intentional about balancing growth with capital utilization. As we noted during Investor Day, we've made significant advancements in R&D, enabling us to deploy these capabilities at a reasonable cost, which is essential for making this move. Regarding the mindset behind our decisions, we believe the future of teamwork will center around human-AI-human collaboration. We are innovative in how we implement this collaboration. Currently, we have a strong offering that we want to share with as many users as possible, which we believe enhances customer loyalty and promotes widespread adoption of the Atlassian Cloud Platform. We possess a wealth of organizational knowledge, which we provide to our customers in unique ways, encouraging their return to our platform, which is advantageous. This strategy reduces barriers to getting new customers started on their journey quickly, ultimately supporting continual growth at Atlassian in both added users and knowledge workers. Our exceptional R&D team has developed impressive features within Rovo, and we want to ensure these reach as many customers as possible. Historically, we have made bold business decisions, including product-led growth, free editions, and transitioning to the cloud. I'm confident in our strong position and believe our team is equipped to execute effectively and deliver maximum user value. I'll let Joe expand on the CAGR and financial outlook.

Joe Binz, CFO

Yes. Thanks, Mike. There's nothing in the macro that changes our thinking on our commitments that we made at the Investor Day. In general, I would say we remain confident and on track to the plans we laid out at that time. From a revenue perspective, we do expect to tap into large market opportunities to drive healthy revenue growth across cloud and data center through our strategies that Mike talked about earlier around enterprise, AI and System of Work. But all of that culminates in our ability to drive revenue growth in excess of a 20% CAGR through FY '27. Rovo net helps that and we don't see anything in the macro right now that would prevent us from accomplishing that.

Operator, Operator

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

Gregg Moskowitz, Analyst

Great. Thank you very much. Two related revenue questions, if I may. Just first on cloud. The shareholder letter mentions that enterprise deals landed later than expected in the quarter. Joe, was that back-end linearity enough to impact the Q3 cloud revenue growth? And then secondly on data center. So tapping duration at one year clearly should provide longer-term benefits. It is, however, causing some investor confusion right now. Just given that data center has meaningful upfront revenue, are you able to provide some context on what impact the duration change had to data center revenue growth for Q3 as well as what's being assumed for Q4?

Joe Binz, CFO

Yes. Let me start with the cloud question. So we definitely did see deals fall more back-end loaded in the quarter than we expected. That did have impact on the cloud revenue growth rate that we delivered in the quarter. As you know, from a billings perspective, that still is healthy and we expect that revenue to be recognized in Q4. We just recognized less in Q3 than we expected. From a data center perspective, I would just say growth in the quarter was primarily driven by pricing and it was partially offset by strong migrations to cloud and as you mentioned, fewer multiyear agreements. I would just highlight that other drivers for data center such as customer retention, renewal rates and expansion were healthy. So overall, we felt it was a good quarter of fundamental underlying data center performance. I would say if you think about the impact of multi-year agreements, we do recognize revenue in the period that we sign those agreements based on the total contract value. So when the duration of those agreements is shorter on average, we do recognize less revenue in the quarter and that was definitely an impact on the data center revenue performance that we had in Q3.

Operator, Operator

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

Arjun Bhatia, Analyst

Thank you. Joe, I would like to follow up on your response regarding deals closing later in the quarter for cloud services. Is this primarily due to unique customer timing, migrations, or other factors we should consider? Additionally, as we think about the cloud platform's parity compared to data centers, it seems we are close to achieving that. However, I'm interested to know if there are still obstacles that customers face when migrating, or reasons why some are remaining with data centers. What are they waiting for beyond internal processes and change management, if anything? Thank you.

Joe Binz, CFO

Yes, thanks for the question. I'll go first. In terms of the deal timing and the linearity in the quarter on the enterprise side, I think it's really a function of the fact that we're doing larger, more complex deals. They're taking longer to close than we expected. This is a muscle and capability we're building in the company. And so especially when you have the level of innovation and announcements and change that we're driving, customers are very interested in that. So we're spending more time with them, walking them through those options, helping them understand the value that we deliver and the value that we have to offer. So as a result of that, we are seeing some elongated deal cycles. We don't attribute it to macro. It's strictly a function of the nature of the deals that we're trying to drive with our customers. Do you want to chime in on the back half of the question in terms of customers from data center to cloud?

Mike Cannon-Brookes, CEO

I can address the second part of the question. We are very confident about our cloud platform's position compared to data center solutions. Each quarter, we assist customers in transitioning from data center to the cloud. Recently, we achieved significant milestones, including FedRAMP authorization and launching the Atlassian Government Cloud, where several customers are already participating in the early access program. This is particularly important for federal government customers and their partners in the U.S. Additionally, we introduced the Isolated Cloud, catering to customers seeking isolated compute, storage, networking, and services. Our team is diligently working on standardization efforts, with Rovo now compliant with ISO 27001 and SOC2. We've made great progress in compliance alongside improvements in scale and performance. Overall, we are optimistic about our customers' current status. The cloud offers a superior experience for Atlassian users compared to data center solutions. From my interactions through Team '25 with various companies, it's clear that their move to the cloud is a matter of when, not if. During the last quarter, we secured cloud deals with major players, including one of the largest investment banks globally and a leader in memory and chips, as well as significant partnerships with major financial services companies in the U.K. We're pleased to see strong customer engagement in this area.

Operator, Operator

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

Mark Cash, Analyst

Yes. Thanks. This is Mark on for Adam. I just want to go back to the cloud migrations and data center moving to annualized only. Does this potentially increase the amount of cloud growth migrations in fiscal '26, maybe beyond the mid-single digit level? And just confirming that you anticipate data center to grow next year with the adjustment and the other blockers you've announced recently. Thank you.

Joe Binz, CFO

Yes, to address your first question, we certainly believe that we will see improved contributions from migration to cloud revenue growth in fiscal year '26 and '27. As we stated during Investor Day last year, we anticipated these contributions to be in the mid to high single-digit range over a three-year span, and we expect a lower contribution in fiscal year '25 due to the end of support for servers. Regarding the second part of your question about data centers in fiscal year '26, it is still too early to provide guidance for that year. However, we expect continued growth in data centers driven by pricing and customer expansion, though this will be somewhat counteracted by the increasing migration from data centers to the cloud.

Operator, Operator

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

Michael Turrin, Analyst

Thanks very much. Appreciate you taking the question. Joe, the gross margin and the free cash flow margin stand out this quarter. I'm just curious if you can speak a bit to what you're seeing in terms of the overall efficiency gains, how you're thinking about your ability to continue to drive margin, particularly if the growth environment at all turns. I know Atlassian has taken a counter-cyclical approach previously, but just curious how you're assessing those trade-offs currently. And just more commentary on margin as well is helpful. Thank you.

Joe Binz, CFO

Yes. Thanks for the question. It was another great quarter on the gross margin front. As you can see, we posted gross margins of 86%. That was solidly better than what we guided coming into the quarter. In cloud, the story remains the same, just more of it. We continue to benefit from price increases, upsell to premium edition, and importantly, engineering-driven investments we're making to optimize cloud infrastructure and support costs. And as I've said in the past, focusing on and managing cloud COGS efficiently right now is particularly important given the expected growth in that part of the business and the opportunity and strategy we have with Rovo in the AI space. I'd also reiterate that this highlights one of the big advantages of the engineering investment model we have at Atlassian that we've talked about in the past, which is investing in world-class engineering talent that can work on unlocking efficiency improvements and cost-to-serve. And as I mentioned last quarter, some of the very best work in the company is happening in this space. So we believe there's more to come. So overall, we feel very good about the gross margin picture and trends and how trends are shaping up. And we do believe those efficiency gains will be structural in nature and we'll be able to maintain them going forward.

Mike Cannon-Brookes, CEO

Okay. I just wanted to add on top of that. Look, we've always been incredibly prudent stewards of capital, I like to think. And balancing our approach to growth and profitability across our whole history, we've given some pretty clear long-term targets. We're executing really well, I would say, on our journey to those targets, both top line and bottom line targets that we've given out beforehand. The R&D team has done a fantastic job, as Joe mentioned, getting efficiency out of cloud at scale and continuing to do so quarter-on-quarter. It's this sort of work that allows us to do things like including Rovo in our operations, right? It's not just about taking AI costs and some fantastical new features and making them significantly cheaper to run. It's also about the other savings we've been able to make in other areas of the cloud. So a great example maybe of how we're constantly trying to balance that growth and value delivery to customers along with the profitability and margin and doing that alongside each other. So really proud of how the team has executed here in the last few quarters.

Operator, Operator

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

Arsenije Matovic, Analyst

Hi. This is Arsenije for Alex. Thanks for taking the question. How has the outlook on cloud revenue changed given the back-half weighted enterprise dynamics you saw this quarter? Was the expectation being below impacted more by better high-grade deal momentum than expected? And also in the shareholder letter, cross-sell adoption of high-value deals, top-of-funnel performance and retention was in line with expectations versus last quarter being in line to slightly ahead. Is there any clarification you can provide on where you outperformed the expectations last quarter versus this quarter outside of deals just landing later than expected? Thank you.

Joe Binz, CFO

Yes. Thanks for the question. From a cloud perspective, we did deliver 25% year-over-year revenue growth that was better than we expected coming into the quarter. The core underlying performance in our cloud business was very similar to Q2 with trends from Q2 continuing into Q3. The variance to our expectations was driven by two factors. It was better-than-expected, paid seat expansion and data center migrations. All the other drivers in this part of our business, whether it's cross-sell of additional products or adoption of higher-value additions or top-of-funnel performance or customer retention, those were all in line with our expectations going into the quarter. In terms of looking at the level of beats relative to the guidance in Q3 versus the first half, I would just start by saying that in both Q1 and Q2, those were exceptionally strong quarters where we executed really well against a very robust set of opportunities in pipeline. Then I think fundamentally, Q3 is simply a seasonally slower quarter for us. So there was less opportunity for the level of outperformance you saw in the first half of the year. And then I know not specific to cloud, but more generally, there were some mechanical dynamics, particularly in data center and marketplace that negatively impacted revenue growth on the margin. And I think taking all of this into account helps explain most of the difference between our H1 performance to guidance in Q3.

Operator, Operator

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

Kash Rangan, Analyst

Thank you, Mike and Joe. I'm currently on a plane, so I'll keep this brief. I'm interested in understanding the impact of tariffs on your customers' businesses. It might be a bit early to assess, but what feedback are you receiving from your top customers regarding their prioritization of Atlassian during this period? Additionally, could you provide some insights on the CRO transition? I know a new CRO joined at the beginning of this quarter. Could there have been an adjustment period and a shift in the go-to-market strategy that might explain the slower nature of the business? I'm eager to hear your thoughts on this. Thank you.

Mike Cannon-Brookes, CEO

Sure, Kash, let me address the first part of your question. I appreciate you connecting with us from a plane. Regarding the impact of tariffs on our business, I want to emphasize that we are in a very strong position at the moment. Our business remains healthy, and I don’t see any significant macroeconomic impacts at this point. Our pipeline appears robust, and customers continue to show interest in migrating to cloud services while expanding their use of Atlassian products. Team '25 has led to a very positive response from our customers about our efforts. We feel confident in our healthy position as a business, though we recognize the complex environment we're operating in, and we remain vigilant about its developments. Having led Atlassian for over 23 years through various cycles and uncertainties, I can say we have a strong executive team with diverse experiences. We've navigated similar challenges in 2008 and 2020. Each situation is unique, but there is much to learn from past experiences. In terms of resilience, we serve more than 300,000 customers from various industries and regions. Our go-to-market strategy and customer base have evolved since 2020. For instance, enterprise customers represented 15% of our sales back then, and today they make up over 40%. This shift over the last five years provides us with greater balance. Our primary focus must remain on our customers, understanding their challenges and looking for opportunities to support them. The environment may impact our customers more than us, but we are staying close to them and mindful of their needs. Historically, we have been successful in capturing market share during tough times. Many customers are consolidating their tools onto the Atlassian Platform; for example, Breville switched from ten different tools to our platform. This trend presents excellent opportunities for us to enhance our competitive position. I feel optimistic about our current standing and confident in our strategy. Regarding the CRO transition, Brian is doing an outstanding job. He has been with us for about three months now, and his extensive experience is already making a difference. There is still much for him to learn about Atlassian, given its size and complexity, but our excellent executive team is fully supporting him, and our sales and success teams are also strong. We are pleased with the transitions we are making. Our sales focus remains consistent, and we are continuously working on the high-velocity aspects of our model while catering to strategic customers, ensuring a cohesive go-to-market approach across our entire customer base.

Operator, Operator

Your next question comes from Keith Bachman from BMO. Please go ahead.

Keith Bachman, Analyst

Hi, good afternoon. Thank you. I wanted to address the topic of growth. Joe, in the shareholder letter, you mentioned several factors that led you to adjust the guidance, with more macro influences than in the past. Are you suggesting that there is a more conservative outlook in the Q4 guidance than usual? Additionally, attending the event last month, I noticed many questions about the impact of collections. Specifically, the bundled pricing of collections offers a significant discount compared to purchasing individual pieces. I am curious if you could share your insights on how we, as investors, should adjust our models regarding the pricing and the effect of collections on growth as we move forward, considering the substantial discount associated with bundling. That's all from me. Thank you.

Joe Binz, CFO

Yes. Great questions, Keith. So from a Q4 guidance approach, overall, there's no change and we've taken the same approach to our guide for Q4 that we've taken all year, which is we are accounting for potential impacts of macroeconomic uncertainty and execution risk related to our enterprise go-to-market sales motion. I'd highlight that data center and marketplace, there is greater variability just given revenue recognition and the underlying dynamics in that part of the business around cloud migrations, multi-year deal mix and the transactional nature of marketplace revenue. I'd also highlight that as you think about our FY '26 outlook, keep in mind, we will continue to take a conservative and risk-adjusted approach to our guidance for FY '26, just as we have throughout FY '25. In terms of the Teamwork Collection, while the Teamwork Collection is not a driver to our Q4 guidance and it will have a limited impact on FY '26, we think it is a powerful part of our strategy in transforming Atlassian. And the reason we think it makes sense is because there's an untapped attach opportunity to over 10 million Jira users. And we think we have a real opportunity to drive long-term revenue growth with this through additional attach of Confluence and Loom to Jira, additional attach of premium and enterprise versions since all users must be on the same version, incremental new seats because we have an opportunity to drive wall-to-wall and displace alternative tools. And then lastly, AI credits will drive AI usage and that's going to strategically strengthen our structural competitive position broadly, and that will provide an uplift to our overall business. So overall we're very bullish on the opportunity for TWC, Teamwork Collection, to drive growth over the long term.

Mike Cannon-Brookes, CEO

I just wanted to add, Keith, from my point of view, maybe slightly more philosophical than Joe. Look, collections are about being as customer-first as we can and we always try to do that at Atlassian. It simplifies how our customers can buy and grow with our offerings. That simplicity, that reduction in friction does result in, in our experience, a long-term growth driver that appears over time as customers increasingly want to buy larger amounts of software from Atlassian that they want to not buy it in smaller and smaller pieces, if that makes any sense. They want to buy it in large amounts. That enables us to create quite some significant simplicity in the purchasing behavior, but also simplicity in the deployment and the rollout behavior. As Joe mentioned, that simplicity comes from having a single edition, having a single seat count and any new offerings that are introduced like Rovo, for example, into the Teamwork Collection will just appear for those users, which is a much easier experience for the customer. I believe over time that will lead to continued growth. That's part of the reason, but also lead to customer stickiness and customer happiness as more of our functions are exposed to more people within that organization and it gives us a larger opportunity to go after the knowledge workers that we don't have access to in many of our customers at the moment or who don't have access to our products. So philosophically, I think it's about simplifying things for our customers in terms of their purchasing behavior.

Operator, Operator

Your next question comes from Rob Oliver from Baird. Please go ahead.

Rob Oliver, Analyst

Great. Thanks. Good afternoon, guys. Mike, for you and then, Joe, quick follow-up for you. Just on the three cloud strategy, which seems fairly straightforward around commercial and government cloud. I'd be curious on the isolated cloud just to hear a little bit more from you, Mike, on what the strategy is there? Is that a new type of customer? Is it a customer that otherwise might not have been as willing to move to an Atlassian managed cloud that's currently in DC? And then, Joe relative to your comments earlier on cloud COGS and cost-to-serve how should we think about as that ramps in '26 and certainly not asking for guidance there? But as we think about that ramp, how a single tenant solution option in cloud could potentially impact cost-to-serve? Thanks, guys.

Mike Cannon-Brookes, CEO

Sure, Rob. Let me take the first part of that. The strategy around Isolated Cloud is about continuing to make sure that we're serving the entire breadth of our customer base. As we scale in the enterprise, as we scale in ever larger and more complex customers, some of those customers, some very small amount of them, have particular needs. And so Isolated Cloud, with its own sort of dedicated storage, dedicated compute and dedicated networking for the customer, certainly appeals to some amount of the largest and most complex organizations and also those that have particular needs and choices. We want to make sure we're offering a set of services to all of our customers that did meet their particular needs. A lot of the architectural changes and improvements we've made over the last three years in cloud and in the cloud platform allow us to do this. Things like data residency, which you can think about deploying our cloud in different regions of the world, and then FedRAMP, which has led to Atlassian Government Cloud, allowing us to meet various conditions that are required for those federal customers and their partners. You can think about Isolated Cloud as kind of the next stage in our journey architecturally to be able to deploy, think of it as conceptually an entire Atlassian Cloud, all of the services for a single customer, and to be able to do that both at an effective R&D speed perspective, so that we can get the features out to those customers in the same way they are getting a cloud software. And secondly, being able to do that from a cost management perspective, both that the customer is willing to pay and sees value in. And secondly, that Atlassian can deliver it at the right margin and price.

Joe Binz, CFO

And then I'll take the second part of that, and thanks for the question. I'll start by talking a little bit about the long-term structural view of gross margins and then I'll dive into your specific question around Rovo and the impact that's going to have. I'd say the savings and efficiencies to the question we answered earlier that you see this quarter, they are structural and sustainable. But as Mike mentioned, keep in mind, we'll continue to add more and more value and related costs to our cloud products to strengthen our structural competitive position. And the strategy with Rovo is a great example of that. So while we create capacity with savings and efficiency, we also backfill with additional costs over time. So in terms of our longer-term guidance, company gross margins are going to be primarily impacted by the factors we've talked about in the past. So that's things like our revenue mix, which will increasingly skew towards the cloud and progress on our cloud gross margin improvements. And just from our perspective, our goal is to drive year-over-year cloud gross margin improvements as we scale such that we can mitigate as much of the impact from that revenue mix shift to cloud as possible. And as you've seen over the last few quarters, we've been very successful at doing that. So that's the overall mindset we have as we look to shaping future gross margin trends. And when you net all that out, we do continue to expect blended gross margins to decline over the next two years, consistent with what we shared with you at Investor Day last May. In terms of AI COGS in the near term, it is early days and the impact from Rovo and AI-related COGS is pretty small and we're managing it well. Obviously with the change in our Rovo pricing and packaging strategy, there will be a significant investment in COGS. But as you read in our shareholder letter, we believe that decision is absolutely the right thing to do to strengthen our structural competitive position and drive long-term growth. Over the long term, we do believe AI-related costs will come down the curve as multiple vendors compete in that space and we'll continue to optimize our AI infrastructure and support requirements just as we're doing on the other aspects of our cloud platform. And as you can see from the results this quarter on cloud gross margin, we are driving savings in cloud COGS that creates that capacity. And so in the future, we feel we are really well-positioned to be able to manage this change in strategy from a margin perspective.

Operator, Operator

Your next question comes from Raimo Lenschow from Barclays. Please go ahead.

Raimo Lenschow, Analyst

Thank you. I wanted to go back to Kash's question on Brian earlier. Obviously, you're kind of planning for the new financial year that is coming up. How should we think about changes to the go-to-market because Brian coming from SAP, and he's bringing like an enterprise focus that might complement what you had before. But do we need to think about changes to your go-to-market in that respect? And then I had one follow up.

Mike Cannon-Brookes, CEO

Thanks, Raimo. We're continually evolving our go-to-market strategy. This transformation happens every quarter and certainly every year as our customer base and their needs change. We've experienced this transition before, moving from traditional sales to incorporating data centers, and now focusing on cloud and subscription models. We’ve successfully adapted our approach to engage with the largest enterprises globally, with over 500 customers now spending more than $1 million annually with Atlassian. We've scaled our enterprise business from 15% to over 40% of our sales, which includes both cloud additions and premium services. Our go-to-market strategy continues to evolve as we assess customer needs and identify significant opportunities. Brian brings valuable experience from his work with large global enterprises, which will help us serve our largest clients effectively. As part of our team, we are all learning about the large-scale frictionless model we operate, which now includes over 300,000 customers and various offerings. New products like Loom and Trello present unique sales dynamics compared to our traditional offerings. We are committed to being a learning organization and are excited to have Brian on board as we move forward.

Operator, Operator

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

Unidentified Analyst, Analyst

Hi, guys. This is Billy on for Jason Celino. Mike, it sounds like feedback and demand for Rovo has certainly been very positive, but of course, we're still in early days. I just wanted to get a pulse check on where you think we are in enterprise, agentic AI adoption and maybe what some of the barriers out there still are to that adoption curve.

Mike Cannon-Brookes, CEO

Thank you, Billy. That's an excellent question. We're still in the early stages of agentic AI adoption in enterprises. Many companies are experimenting and trying to understand what the technology can do, and they are understandably cautious with their enterprise data. We receive numerous inquiries about Rovo's commissioning, structure, and access to content, as well as its architectural integration. Customers appreciate our thoughtful approach to these concerns. It’s natural to be cautious in this new technology area, but they recognize the potential benefits and are being careful about how they implement it and where it can provide a return on investment. A significant part of our engagement with customers focuses on helping them navigate this understanding. Currently, there is a noticeable gap between awareness and actual usage of AI. We aim to bridge that gap with Rovo and our various offerings that allow for data connectivity and learning. As we mentioned, we have different ways to deliver value and ensure Atlassian can benefit from that value over time, including higher-tier editions and consumption-based pricing. This area is continuously evolving. Customers are particularly excited about the variety of agents we offer and their familiar interaction style. What sets Rovo apart is how an agent interacts within the software, making it feel more like collaboration with team members than the traditional AI approaches. This has received very positive feedback from our customers. The ability to iterate between humans and agents in a back-and-forth manner to complete tasks resonates strongly with our approach, as it feels like we're enhancing their teams rather than replacing roles. We are still at the beginning of our journey, but there's considerable excitement among our customers, and we aim to make this technology accessible to as many users as possible. We're seeing good traction, as evidenced by our growth from 1 million AI to over 1.5 million AI in just one quarter, and we expect this number to continue rising robustly.

Operator, Operator

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

Mike Cannon-Brookes, CEO

Thanks everyone for joining our call today. As always, appreciate the thoughtful questions and continued support. It's great to see a whole lot of you on the call at Team '25 just a couple of weeks ago in Anaheim. Have a kickass day and we'll talk to you in next quarter.