Q1 2023 Atlassian Corporation PLC Earnings Call
IR website.
Please keep in mind that wed like to allow as many of you to participate in Q&A as possible.
Still take that we'll take one question at a time. Please rejoin the queue of you have another question or follow up and we will do our best to come back to you later in the session.
With that I'll turn the call over to Scott for opening remarks.
Thank you for joining us today, we are proud of our execution in Q1 against our long term initiatives, we announced a new subscription offering and atlassian together once atlas into general availability and.
<unk>, our first lifestyle customer event focused on a single market.
As you've already read in our shareholder letter I was asking is not immune to the broader macroeconomic environment, but we remain steadfast in our conviction that we have the right leaders products and strategies in place to capitalize on the incredible.
Long term opportunities in front of us.
Turbulent markets provide an opportunity to shake up the leader boards and we are poised to play offense.
We will focus our investments to take share and strengthen our market position in this environment.
Well of course balance our continued investments with the overall growth of our business and be responsive to the macroeconomic conditions.
We continue to have line of sight to $10 billion in annual revenue and believe we will come out of this environment a much stronger market position.
I am incredibly thrilled to pass the CFO baton to jug gains through I want to welcome to his inaugural earnings call.
He's only been Houston early September , but it's quickly gotten up to speed and we will do far better than me and my short stint as interim CFO .
With that I'll pass the call to the operator for Q&A.
We will now begin the question and answer session. If you have a question. Please press star followed by the one on your fine.
If you'd like to withdraw from the queue. Please press star followed by the <unk>.
Your first question comes from Keith Weiss from Morgan Stanley . Please go ahead.
Excellent. Thank you guys for taking the question.
I guess kind of.
Topline and our bottom line question.
You guys mentioned in the shareholder letter and I appreciate the.
Being upfront about kind of the macro impacts you are seeing.
Free to paid conversion slowed down and some of the paid.
It sounds like NRI slowed down a little bit what did you guys have been seeing in kind of top of funnel trends.
Is that kind of filling as as expected or did that slow down as well and then you are sustaining the operating margin guide for the full year, even with the with our revenue is coming down a little bit.
Where are the areas you guys are looking to get the increased efficiencies as we think about FY 'twenty three thank you.
So first off this is Cameron I'll speak to the topline condition, then hand off to Joe to talk about expenses. So yes as.
As we mentioned.
Previous quarter actually back on our August earnings we spoke about how while we're seeing plenty of people coming in and try and Youre trying to our free versions of our products and we continue to see that trend today, many more people come in and signing up and using our products. We saw them starting to slow down getting to that 11th user entering their credit card information and becoming paid customers.
So that trend definitely came true throughout the quarter and we see it today, where we still have plenty of people coming in year over year growth of our for instances continues to grow which is great, but just a little bit slower in the converting to actual paying customer.
The new piece, we saw in the previous quarter was that towards the end of the quarter. We actually saw user expansion in existing accounts. So this was largely people going from 100 users and confluence to 110 users right.
That's largely due to company's slowing down hiring trying to constrain their own internal it budgets and using more of a license. They already have now we continue to see growth just that user growth wasn't nearly as strong as what we've seen historically on the other side on top line, so while the user growth slowed down.
We do continue to see migrations.
Tracking along as planned our additions working and people from standard to premium and enterprise versions of our products strong and cross sell.
Service management, specifically continues to be adopted well so.
While we are affected by basically hiring rates and how quickly people are adding people to their organizations the big projects like migrations or choosing their new it service management tools, we've seen no slowdown in those efforts to date.
Joe do you want to handle the expenses compensation.
Okay.
Yes, Thanks, Cameron, Thanks, Cameron and thanks, Keith So theres really two focus areas first and foremost, we're making reductions in our non head count driven discretionary spending and then secondarily will be moderating the rate of planned head count growth in the second half of FY 'twenty three.
I'd say in terms of areas Keith I think there is efficiencies to be found across the board, whether youre talking about gross margins or our process efficiencies or even resource allocation right looking at where we have our resources allocated to make sure that we're constantly prioritizing investments in moving those resources at the highest ROI most impactful things.
Scott mentioned this is all with an eye towards strengthening our position in the large high growth markets were targeting and enabling us to emerge in a stronger position.
Out of the downturn as we were going in so hopefully that gives you a sense, but I would say, it's very broad based on those two primary principles got.
Got it that's super helpful guys. Thank you so much.
Your next question comes from Michael <unk> from Wells Fargo Securities. Please go ahead.
Hey, there.
Thanks for taking the question I appreciate it and I'm sure it's going to be.
Somewhat of a similar construct to the first one but.
<unk>.
Little bit differently. So.
A couple of parts. The first one is just clarifying some of Cameron's comments from the first question. It sounds like it's fair to assume that it's more it's less the cloud.
Migration trajectory like the pace of migrations that youre seeing changing here that's influencing the change in revenue target for cloud for the year that it is the expansion rates. So first part is just is that a fair assumption that that 130% to 140% for large customers that were seeing is as was.
Causing the moderation of the impact and then the second part for Joe is just I know you're relatively new to the call, but your views just around <unk>.
Potentially giving more margin.
Would inform that discussion versus just continuing to stay the course with the investment cycle I know the company tends to think long term. So just your thinking given the macro is changing a bit I think is useful here on the context of what you're seeing thank you.
How would you speak to just be very very clear, yes, we have seen no change in our migrations rates. Our migrations progress project progress continues to be on track as its been the last few quarters with the server end of life coming up to February 2024, as well as our loyalty discount.
Ram which will.
So we take another step down in June we have a series of compelling events that we've been working with our customers over the last couple of years, we get better and those conversations every day and the migration efforts continue to be right along with plan. So no no impact due to migrations it is largely.
Purely focused on people, adding users that user expansion within their existing use of our products that we've seen slow down a bit over the last quarter.
Great. Michael This is Joe Thanks for the question on the MLR question that expansion rate question. As you know we don't provide updates on expansion rates on a quarterly basis Directionally. It remains very healthy and above the 130%. We discussed at the Investor Day, I think that's indicative of the fundamental health of our business, particularly around upgrades to premium and enterprise editions.
Customers, adding new products and churn rates and while we talked about the macro impact on paid seat growth within existing customers relative to expectations.
Absolute growth rates there are still very good on an absolute basis. So that's a big that's also a big driver behind those healthy expansion rates and I'll turn it over to Scott to talk a little bit about the margin tradeoff discussion.
In terms of.
Stepping back in terms of thinking about a long term like we've been through multiple downturns as a business like we started in <unk>.
Instead of the Dot Com crash, we went through all that going on.
And I guess, we're now in a downturn for us and what we've won during those periods of time like if you can invest wisely you can come out the other side.
The leaderboard shaping up a little bit and you can come out higher on that way to both anyway going union. So that informs a lot of how we think about the investments through this period.
So there's a couple of areas. One is we think that we can pick up staff, where other companies are.
Offsetting soft there's a lot of incredible people in the market.
Come on the market once a decade, and we have an opportunity to pick those stop now and so let me be really thoughtful around kind of how many we hire and where we are.
Our experience is that we can come out really strong on the other side by selectively picking up staff.
But other people letting go.
We also in terms of thinking about what the opportunities and.
We said in our Investor.
Kind of feels like a long time ago now.
Earlier this year, we said we have three really good opportunities that we were going to invest behind that was migrating our customers to the cloud at the fastest rate we can.
Building new products to that point I program.
And investing more in audio Assembly Gotcha I assume.
Platform, there and so again, we think those are long term investments that pay off short medium and long term, we want to continue to invest in those areas.
And so we're going to continue to do that and so we can be thoughtful around that way, we need to make sure that those fit within a certain cost envelope.
And with the macroeconomic environments like we want to be conscious about what that cost and bought us, but you're getting a philosophy about investing for the long term.
Well priced products.
At a very particularly attractive in this market picking up staff that Hasnt science through this through the cycle.
I appreciate all the detail there. Thank you.
Your next question comes from <unk> <unk> from Citigroup. Please go ahead.
Good afternoon, and thank you for taking my question.
Kevin a question for you.
Little bit of a counterfactual.
Thank you.
It seemed to me to the proportion of your cloud growth coming from migration, but Conversely, why wouldn't you see a slowdown in migration to the cloud.
Hey, good evening.
TB is on your expansion area.
In other words.
I wouldnt existing customer just went out.
City that the harm versus going Q2, concurrent user seat model, where potentially the TCR in the short term can be much higher just a couple of thoughts there on why that wouldnt actually.
The migration to the cloud.
So basically let me just try and rephrase the why haven't we seen a slowdown in the cloud migration rates when it is a.
An effort for customers to make a change versus just sitting on there.
Renewals and wait until the last minute.
The reason for that is.
That over the last two years ever since we announced the server end of life now almost exactly two years ago, we've had a very well engineered set of programs.
That we have released between loyalty discounts new migration tooling more engagement with our enterprise customers and incentivizing, our partners and incentivizing our customers to ensure that cloud is the proper destination for them and many of them over the last two years have been in various stages. Some moved very very quickly and some are building plans today some are waiting.
Like you said to the last minute, but across the board we have seen.
That entire approach being largely on track so they haven't been seen the history, we might be great to cloud as a capacity to challenge its not like 100 users. The fact that they need more AD users. They can you add more users on premises if they want versus adding more users on cloud it's more.
Well, we've been looking to go to cloud we've made the strategic decision to go to cloud there is a whole lot more value that we unlock in cloud and more productivity for the users. We have so let's go through and continue to finish. This project. So that our offer our teams operate more efficiently and have the best tools available to them.
Even if we were going to have.
Less people hired in the future. So it wasn't really tied to how many people are in the room, it's more tied to them choosing the best solution for them long term and of course reacting to the programs that we put into market to compel them to move to cloud.
Thank you Tom.
Okay.
Your next question comes from Arjun Bhatia from William Blair.
State your question.
Hello, Yes. Thank you for taking my questions I'm curious just when you think about the macro impact that youre seeing is there any way to just break it down any further between the behavior that you're seeing from larger customers that are maybe multi product that are more committed than ever broader deployment versus smaller customers.
<unk> that are that are early are earlier in their journey and then Joe one for you just when you're thinking about the rest of the year and the guidance that you've provided can you just help us understand.
What you're incorporating from a from a macro perspective and the forward numbers. Thank you.
Hey, John I can I can take that one.
Uh huh.
I want to re stress our philosophy of open company negotiate told you every single quarter, we've been public we're going to be open with you and clear with you about what's going on we've.
We've tried to do the best we can in the letter.
The two areas that we're seeing impact again is the free.
Three instances the rate of converting to paid.
And secondly is the rate of user expansion growth that historical rate has been pretty consistent for us slowing down a bit.
The reason for that is we think both anecdotally and best guess is our customers optimizing their spend.
If you are going to add that 11th user you are more likely today to thank al Stanton.
The good part about that for us is.
We see no sort of decrease in usage or change in churn rates. These aren't customers, leaving atlassian at all of these are customers, who are dealing with their own turbulence and optimizing our spend and.
And tuning the number of users they have Brian .
We've also highlighted where do we see as great opportunities in front of us and being quite clear about where we're playing offense and some of them go to the areas that you said.
Cameron just addressed migrations, which continues to be strong.
Think about it from a customer perspective.
If youre looking at optimizing spend cloud to an easier place to do that than on premise. Because you are anti monthly you can pay per user et cetera. So that gives you a slightly is optimization and secondly, it's a much higher ROI in terms of running the software we do all that for you. So that's why we see.
<unk> opportunities in migrations, which are tracking strongly.
Secondly in enterprises, we certainly see that a significant opportunity on the back of 10 years of really great work Youre continuing to optimize for the enterprise that's a huge opportunity area for us.
And lastly, as you've mentioned repeatedly and I TSM I was seeing really strong growth. So.
All of those play into the enterprise that he talked about but hopefully that gives you. Some background color about where we think we are well positioned to gain market share in this environment and really excited about the future.
And this is Cameron I'll add a little off.
Sorry.
Just give me a little more.
Do you have the how we do SMB growth over our enterprise customer base growth now first and foremost that.
The constraints in the growth rate of users, we do largely see across all cohorts like I said on all sides customers industries and geographies it seems to be broad across the customer base. However, we do consider continue to see strength in our enterprise business for a few reasons, primarily due to the fact that migrations, which are going as planned.
Have an outsized impact when it comes to our enterprise business compared to our small and medium size business simply due to pricing dynamics.
The second is also in our enterprise business that we continue to see.
Continuing to standardize on our applications choose the enterprise editions of our products when they moved to the migrations, which continues to grow their inputs on top of that in just over the last month, we've announced a partnership with Accenture, which gives us massive scale.
One of the large global system integrators in the industry to help our customers through their massive transitions, whether that's our agile transformation or their cloud transition.
And just today as Mike mentioned that our growth in it service management market. We were named a leader in the Gartner Magic quadrant, which shows that even more enterprise credibility as we look to expand into it operations and service management use cases and the enterprise.
And then RJ. This is Joe you asked about the assumptions underpinning the guidance, we're assuming two fundamental things in our guidance first the current macroeconomic environment.
Persist throughout the year, it does not get materially better or worse, and then secondarily the macro impact on the business and the trends we saw in Q1 around free to paid conversion rates and paid seat expansion with existing customers also persist throughout the year. It does not get materially better or worse. So in other words the guidance assume status quo on those two factors.
Like most we continue to monitor things closely both on the macro side and on the business side, and we're adjusting and responding to it.
As you know Theres a lot of uncertainty right now and we think that this is an appropriate range given what we've seen to date, both in Q1 performance and our Q2 quarter to date performance of the underlying trends we saw there.
Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.
Yeah, Hey, guys. Thanks for taking the questions. So I wanted to dive into that last.
The last answer.
Both.
Cameron.
And.
And maybe others I guess, if we think about the enterprise impact like can you maybe dissect the cloud revenue.
Growth.
For the year that they take it out.
Is it are the C that the headwinds from the seat adds is that more on the mid market. The SMB. The enterprise is there.
Would you say, it's being compensated by incremental module additions at the enterprise help us unpack that and give us a sense for when you started to see these issues is that over the last two weeks of the quarter. How that's trended in October and from the financial perspective is the cloud growth kind of exiting this year, where does that trend because if I.
Remember correctly at the analyst day, we talked about that 50% wasn't just for this year cloud growth, but for a couple of years, So I'm assuming.
It's coming off for this year, but I just want to clarify is that also offer the next couple of years.
Apologize for call for questions.
No problem at all I'll address the first part and then hand off to Joe. So as you know our cloud growth easy to think is that it's new customers coming in those customers, adding users.
To the institute of the products that they had purchased in.
In addition to upgrading additions to either the premium our enterprise version of their products.
Also migration is another big piece of our cloud growth roughly 10% of our growth is due to migrations and of course cross sell expanding out to our other products.
To diagnose specifically, what we saw in Q1.
Specific areas. We saw in Q1 was the net new customers starting to slow the rate we still added over 6000 net new customers.
We saw that somewhat slowing down of free customers slowed their conversion to paid customers and we saw that user growth. So someone who is an existing cloud customer.
Slowing down the rate on which they added more users we did not see any impact to either migrations or addition upgrades or in our major cross sell motions. So it's primarily just the user additions tied to largely hiring are customers, adding more and more employees into their business, and then slowing that down which slows down our user growth.
Those other FX that efforts are.
Right on track as we originally planned.
Joe.
Thanks, Kevin and then Alex to your question on how we're going to exit Q4, we expect to exit Q4 with cloud revenue growth rates in the 40% to 45% range.
Perfect. Thank you guys.
Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.
Okay. Thank you for taking the question. So I think that Atlassian has an unusual software company and a good way a couple of the reasons being that one.
These are typically very linear and two you have tremendous visibility into customer buying and usage patterns and so I would have to believe that you had a very early warning of the paid user growth slowdown that began midway through the quarter and with that said what I'm wondering is was there anything that you were able to do that has enabled us to mitigate the slowdown.
Has it unfolded investor.
Pretty surprised to see results like this from Atlassian and <unk> and so the question here, where the spirit of the question is whether you have the ability to make adjustments and navigate the difficult macro better than others. Thank you.
Hey, Greg This is Kevin again.
Sorry, Scott go ahead.
It's Scott here.
Just wondering sort of philosophically, Greg one of the things we look at long term company and.
There are many fewer.
Drive their quota is really back from the sales team so to say or how many people I got and how many reps do I have not sell they run the business. If you look at our business. It really is a.
Much more long term self serve model, where our customers comment. We're also from a process. Thank you.
Much more.
Uh huh.
Originally proxy on a per seat basis, and many of our competitors out there and so it doesn't feel good and bad there are many things we can do within a quarter to affect the quarter's results, which is why you see the linearity of that you've seen over the years from the last year and so when I look about that.
The macro environment and what we're saying.
We've talked to has every which way by geography by product by market segments. It really comes down to that customers are not adding some heads and by the way they used to because of the hiring environment has changed outside of Atlassian I'm sorry.
We say that we're trying to there.
But they are in a long time and we're really.
We've got we can sell more products to customers or where you have a great product pipeline and a product we've had great market opportunities in Ics and the migrations are still going strongly.
Isn't that going strong use of the rois are so compelling to them.
Doug if I ask more money the overall cost to them of KC yogurt goes down because I can have less people.
Two things.
In an environment, where the high demand service data centers and so that's a great opportunity, although it's a great opportunity for us and not short term.
Do something within a quarter, but I really play out over the long term and again when we look at sort of the opportunities for US now they ought to take market share because we have great products that are.
Uh huh.
<unk> cost competitive versus competitors out there and what we're seeing in entities that we haven't seen any material change.
In turn like its mostly on adding seats.
So then also points to the stickiness of our products and so.
The way I think about that.
Very helpful perspective, Thanks, Ken.
I can also add on to just the timing of things that we saw.
We mentioned in August what we're seeing in the August timeframe was the net new customers to the free customers converting to paid was slowing down.
Going into August .
Normally through our summer season in the July and August tend to see user growth slowdown across our customer base largely due to seasonality vacations and holidays. It just tends to be a normal seasonal trend where July and August are slower as people are not upgrading instances, adding more users.
What we noticed is usually most of yours and when you come back in September everyone's coming back to work the holidays were off and people start adding users and upgrading their instances again and that's when we actually did not see that normal user growth uptick that.
That we normally do in September the great thing is that when the advantages that we do have is that we have plenty of other growth drivers. We can continue to leverage in our business, whether it's upgrading additions continuing to escalate our migrations efforts or relying on expansion to other products of which we've even released a few new ones over the last few quarters. So.
Plenty of other levers that we tend to Paul when we see user expansion slowdown.
Great. Thank you both.
Your next question comes from Brent Thill from Jefferies. Please go ahead.
Head count accelerated the SaaS growth in 11 quarters kind of into the spaces.
This slowdown can you just talk to what.
What youre going to do through.
Through the next six to nine months in how youre thinking about that that the investment pace and then just a quick follow up on the geography.
Respective EMEA looked like it had the biggest hey can you comment on what Youre seeing in EMEA.
Versus the U S. Thanks.
Although the head count and then Jim can talk about the Gi side of things on the head count.
It is our high watermark on head count growth, where you do have from a seasonality perspective, a lot of graduates coming out in the U S. We started this quarter so I got it.
It gives this quarter's numbers.
Bruce.
Thinking about sort of what does that headcount moderation look like going forward.
Still going to be growing our head count but of course moderating that growth in light of the macroeconomic conditions and ensuring those people are going on the most productive oil projects.
Yes.
Yes, My geographic perspective.
I mentioned prior.
The trends, we tend to see across our customer base has been largely across all segments industries and geographies.
So when we look to Europe , specifically, our APAC, we have seen no quantitative change other than what we've already spoken about the user expansion slowing down but migrations are addition upgrades our cross sell programs continue to be on track from a quantitative perspective qualitatively when we talk to customers, we do get plenty of.
Discussions and concerns about largely uncertainty, we see going into the next year plenty have financial concerns related to a variety of macroeconomic efforts that there are areas that we see impacting their businesses that has not cost projects to slow or migrations to slow down at this point, but it's definitely a cause.
Instant conversation, we're having with those customers.
Thanks.
Okay.
Your next question comes from Michael <unk> from Keybanc capital markets. Please go ahead.
Hey, guys.
On the subject of the slowdown.
And both expansions of customers and conversions.
Tying too.
Slower head count growth among customers themselves.
Can you say perhaps.
If there is you see anything particular in the development world or in other words alone.
The head count growth or not in your customers for software developers.
And how that may or may not be tied to.
We've heard about in terms of the.
<unk>.
Spend in cloud this quarter.
Michael.
I appreciate the direction of the question is as you know I think head count growth slowdown customers, where is that all I think you are asking.
Apartments are our customers are seeing that head count slowing does that factor into other cloud spend and so forth I think it's too early for us to have any sort of opinion strong opinion on that like we sell across the.
The entire customer base.
And our customers. So it's sort of hard for us to be specific about that because our history is going more to developers.
The thing to take away from our last years results as well it really sticky and our customers. We haven't seen people decide to sort of migrate since we haven't seen people try to reduce or cancel contracts or anything like that it really is just tied to head count growth, but I couldnt give you any more detail under which department studies.
Okay.
One additional question too I mean, you said youre seeing across all segments.
Another way of thinking about it is not segments per se, but customers of different sizes of spend.
Thank you.
You, obviously have some people spending a lot of money with the small small.
Companies are big ones, but there's also the ability to.
Fairly small spend with Atlassian and therefore, maybe in some senses to fall underneath the radar in terms of big budgeting.
<unk> do you see any difference there between where you are a big part of our company's budgets versus small.
This is cameron to answer that.
Not really if you look across the base actually on the small and you see this coming in our freezers like we have plenty of free instances with users nine users 10 users.
And then their willingness to put their credit card in and you'll pay a relatively minimal amount to get into one of our paid plans we've seen that slow down.
Even when we get to our largest customers.
Most of our conversations with our largest customers are about expanding to new product use cases, whether that's tiered service management or <unk> or having these migrations conversations if theyre large on premises customers. So they're project based and a big portion of our revenue discussions are tied to that what we have less discussions with homeowners them, adding 500 user.
Or a 1000 more users because they rapidly expanded their development teams or what have you. So.
The answer is no we have not seen the user expansion tied directly to the share of wallet or their current spend with atlassian. It's definitely much more tied to how many people are hiring.
And how much people are expanding their overall technology footprint in their businesses.
Okay. Thanks very much.
Your next question comes from Steven Koenig from SMB. Okay. Please go ahead.
Okay.
Hi, gentlemen, thanks for taking my question.
Yes.
Given that like the higher velocity sales motions excuse me the most affected here I'm wondering.
If you look at your existing cloud customers and look at the monthly.
People versus the annuals.
Are you seeing any any kind of like earlier slippage in the monthly and are we going to need to work through 12 months of the annual customers renewing.
With adding fewer seats like how do you how do you think about maybe the net expansion rates for those two different steps of cloud customers. Thanks very much.
Yes.
One advantage of our business model is that we have plenty of customers are on monthly plans. We have the option to go annual plans across the board and we launched that customers make the choice.
We have but the good news is it's not like we have all annual plants come up at one time every year as we have annual plans renewing every single month, just like we have monthly plans.
No we see that user expansion.
<unk> that we saw in it over the previous quarter continuing to be like largely even across both our monthly and annual plans and we don't see any major delta between the two.
And as with the monthly plan that is that we will have much more.
Accurate tie to the.
The customer paying for exactly the number of users that are using within the product and allows us Daniel plans, where we can continue to watch those customers with cloud we have incredible telemetry about health and usage of the products and allows us to proactively engage those customers. If we tend to see usage of our activities starting to go into unhealthy territories.
Even us even more ability to run customer success programs training programs.
Mike.
Got it thank you very much.
Your next question comes from Ari to Johnny <unk> from Cleveland Research. Please state your question.
Thank you for taking the question.
Just asking a little bit differently on the user expansion and I appreciate all the color you've given thus far.
Yes.
Any way you can estimate a breakout like exposure to.
The tech vertical I mean, it seems like kind of looking at the headlines you have Amazon kind of slowing hiring shopify stripe laying off people.
Just kind of curious like obviously those companies were hiring pretty aggressively during COVID-19. So just kind of curious if you've accounted or had seen any like.
A benefit from those cohorts during COVID-19, and if youre kind of expecting.
No.
Baking in for user growth from kind of a take a cohort in the coming months here. Thank you.
Yeah.
Alright.
I understand your line of questioning is sort of what are there.
Tayo wins that are coming off from part of it like that we should be thinking about.
We've looked at this and we think about.
Almost every company. These days is becoming a software company.
Whether you're a retailer or whether you are talk company or whether you are a transport company.
Every aspect of the economy is becoming.
The company and that's why people come to our products and I don't think thats sort of secular trend is changing anytime soon and I don't think so expecting a large industry. It's all watch that was trying to use ago. When we started we fell to tech banking to manufacturing like Oh down every industry.
Vertical we sell to them. So I wouldn't say, we're overly exposed to technology workers, we do sell again products that helps thank you.
Our effective in our history was to start with technical teams with those technical teams are in every single company out there and when I talked to our customers are those technical teams are also.
The people that most companies are doing their best to refining during the downturn.
The ones that I've taken a long time to build up a lot of IP.
And they're very hard to restart and so we think that.
It really starts to take industry thoughts.
We do sell to technical teams across the board and we think those things are sort of lost on the line to the <unk>.
Reduced in terms of the macro headwinds.
Thank you.
Your next question comes from Mark <unk> from Raymond James. Please go ahead.
Yeah. Thanks for the question. This is mark one for Adam I wanted to ask about the loyalty discounting youre doing to migrate customers to cloud and understanding this is still ongoing but how.
How would you size the overall potential uplift to revenue and margins as these discounts are rolling off and when would you really start to see that impact. Thank you.
Yes. So this is cameron here.
So the loyalty discounts.
Those who have been followed for a while when we announced the server end of life.
We had aggressive loyalty discounts that roll down effectively every July one over a three year period as we led to the server end of life. So that's actually the sooner that our customers would choose to move to the cloud they would get a bigger discount.
And then over the three year period is the loyalty discounts roll down they eventually get to list price and Thats still the truth for all of our customers.
So.
We still have a lot to discount in place. It's the last year of loyalty discounts going up till June 30th.
As of July of next year, all customers are effectively paying them on new contracts will be paying list all existing customers.
If we were on one year up to three year contracts at the end of their three year terms will be at list price as well.
Joe did you want to add anything.
Yes, Ken I was just going to mention the question around when do we start to see those price changes changes and the impact of those in the model and the answer to that is it is not immediate so theres two reasons for that are first and foremost is the ratable recognition on subscription, which is 80% of our revenue and secondly, the timing of renewals that happened throughout the year post those changes.
So you won't see an immediate impact when we go through those types of pricing changes it will tend to run into the model over time.
Okay. Thank you.
Your next question comes from Peter Wade from Bernstein. Please go ahead.
Thank you.
Earlier, you touched on net revenue retention.
And <unk>.
Referenced back to.
Enterprise, you talked about 130% to 140% previously and that you were still seeing.
And there are over 130% and I wanted to clarify because obviously your cloud.
Revenue comes from.
More than words.
Mid sized businesses, whether or not what you said.
130% youre still exceeding that.
Was that just for kind of the medium and large sized businesses or was that for the entire revs.
Revenue base that you report on.
Yeah, Peter Thanks for the question. This is Joe that was for the entire customer base that we report on.
Okay, and then as you were taking a look at.
The smaller customers within there that you are trying to get into paid.
Certainly that transition is frustrating but.
I think that you were alluding to it in the note here, but.
How are you seeing.
Any competitive pressures there I mean, certainly you Ya.
Things like get lab being thrown around as an alternative that people could use if they have more sophisticated organization is it genuinely that people are just.
Not upgrading to paid or are you seeing situations, where you are concerned with some of these customers that they may be using other solutions to try to get done what atlassian.
<unk>.
Maybe able to do better.
This is one this is Cameron and yes, first and foremost across the board, whether it's through new customer acquisition and our existing customers, we see no real change in our overall competitive position.
We have incredibly strong products incredibly happy customers and we also have apps.
Sort of mission critical.
Critical applications, where we're highly integrated into their environments are specific to what you mentioned that the free users converting into paid.
We haven't seen any competitive dynamic there because we still see them as free users of our products essentially one of the advantages our free program in that people.
We will be choosing us and using our free version of our products and compared to go into an alternative vendor across the board also at a dollar level if budgets are getting more constrained and customers are looking to save money.
Across our entire product base, one of our core parts of it makes it atlassian products. So attractive is that we are relatively price less expensive than most alternatives. So no change in competitive dynamics, nor have we seen competitors being.
Any direct impact to our free to paid conversion rates.
Thank you.
Just Mike I, just wanted to add one thing.
Maybe add a little bit of a stronger.
Message towards Cameron is saying I think I think it's actually an opposite behavior right.
We've talked about playing offense in this environment on a few shareholder letters now.
Again this quarter the same we actually see the upcoming.
Period as a good chance for us to pick up market share in a lot of our markets. We actually think we're very strongly positioned.
In all three of our major markets.
Our investment in R&D.
Are extremely affordable high value products for customers is a great chance for us to pick up market share in an environment, where our customers are optimizing that spend so that's an area, we're very bullish and going after.
As a reminder, if you have a question. Please press star followed by the line.
Your next question comes from Fred <unk> from Macquarie. Please go ahead.
Hi, Thank you I wanted to ask with respect to the slowdown that you're seeing in <unk>.
Net new sorry free to paid conversion as well as just user expansion.
What we're seeing now in terms of layoffs.
Certainly ahead of what we saw the Covid pandemic, but I wanted to ask if you were to compare or consider what youre seeing now to say like the start of 2021.
Hey offs intensified.
Businesses began to freeze hiring and just capital froze.
Have you seen or could you just generally compare contrast, what you're seeing now versus then.
So this is Cameron I will do my best.
Looking back to that area, obviously going back to 2020.
The beginning of the year, we generally saw this kind of right into Covid. We had two things that happened. If you remember that is actually when we changed our business model from going trials based to free.
Which resulted in a huge uplift in sign ups and new free Activations of our products, but we also saw that in line with the impact of Covid small businesses shutting down and so on and if you remember our Q4 of fiscal year 'twenty 'twenty now.
One of our slowest new customer growth quarters ever because of those two dynamics, our conversion to free as well as smaller customers largely going out of business or not renewing.
Two years later now or the tail.
Tail end of Covid, and we are looking to see the trends our net new customer number is still significantly higher.
We had three our free launch so even if you took out all of the.
Uncontrollable unknown pieces of the Covid dynamic over the last two years, our change of business models going to free has significantly altered our ability to acquire and attract net new customers and we see that today.
In addition to that the fact is we still have every single day and continue to see more and more customers signing up coming into our store as I say and clicking the tri button year over year, which is the same dynamic we saw back then.
However, there are plenty to get to the 11th user enter their credit card all of that is significantly dependent on.
Other environments that we don't always have control of the most important piece that we look to is are they using our products are they getting value out of it and we can be patient for the revenue and that is what we see is consistent between that kind of early COVID-19 months and what we see now a few years later.
Thank you and then just I think one follow up on that also.
Also camera that was I think a great job just to try it explaining it.
In terms of just Atlassian together, the bundled solution that you've launched and announced this quarter I know, it's very early days, but.
It seems like that's more of an enterprise focus offering and is there an opportunity outside of just driving sales into enterprise potentially and this aim or use the opportunity of a transition.
From some of these on premise customers to other data center or cloud to onboard them into together.
Brian It's Mike here.
Super glad you've managed to fair it out a product strategy question.
Thank you for doing that.
Yes is the answer.
So a reminder, atlassian together is.
And enterprise focused offering we announced that work life a conference targeting work management.
Now we have more than 150000 customers in the wealth management arena, so a very strong market for us.
There is no doubt that we've continued as you've seen in our platform to make our products as we say work differently together.
We believe every team works in their own way.
And we want our products to work incredibly well together and we also want to work with.
All of the other products that customers use as the number of products per customer I think is topped 80 990 and the lightest Doctor survey and is going to continue to go up we believe.
Last thing together is an offering targeted at our largest customers too.
Allow them to purchase all of our work management applications together that work with each other and all the third party applications.
Generally used.
Focused on customers, who are increasing their spend significantly in terms of the number of users. So when you're rolling out at last year's worth management applications from.
Maybe 2000 employees to 10000 employees.
It's an incredibly good way to do that because you don't have good manage individual applications and usage across our employee base.
Early days.
As you mentioned, if a customers coming from server or data center.
The only really have access to confluence on the server data center realm. So I'll ask them together includes atlassian excess Shiloh to your wealth management.
Confluence.
And Atlas, which is a new offering.
Those five products come in the Atlassian together package, if you're coming from on premise and moving to the cloud you only have confidence. So we do hope it is.
Compelling offering for customers, who are migrating in that space.
Far too early to see any actual results of that yet again, it was only announced a month ago.
Initial customer feedback I will say, it's very positive people understand the offering especially for those larger customers that are moving.
Significantly up in terms of their employee access to our conventional applications and the ability for the multi collaborate with each other.
But when we will have more updates for you has that rolled out.
Thank you.
Thank you and that concludes our question and answer session I will now turn the call over to Mike for closing remarks.
Just wanted to say thank you all for the detailed questions and for reading our shareholder letter and for attending today. Thank you to all the Atlassian employees for another kick <expletive> quarter.
And I hope you have a great weekend wherever you are in the world and we will talk to you next quarter.
[music].