Q1 2023 Atlassian Corp PLC Earnings Call
Good afternoon, and thank you for joining atlassian.
<unk> call for the third quarter of fiscal year 'twenty. Thank you great.
As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section about Lockheed's website. Following this call.
I will now hand, the call over to Mark and lab Atlassian quite of Investor Relations.
Yeah.
Welcome to our loss in third quarter of fiscal year 2023 earnings call. Thank you for joining us today.
Joining me on the call today, we have about <unk> co founders and co Ceos, Scott Farquhar and Mike Cannon Brookes, our Chief revenue Officer Cameron each.
And Chief Financial Officer, Joe Payne.
Earlier today, we published a shareholder letter and press release with our financial results and commentary for our third quarter of fiscal year 2023.
The shareholder letter is available on that lock ins work life block and the Investor Relations section of our website.
You will also find other earnings related materials, including the earnings press release, and supplemental investor data sheet.
As always our shareholder letter contains managements insight and commentary for the quarter. So during the call. Today, we will have brief opening remarks, and then focus our time on Q&A.
This call will include forward looking statements forward looking statements involve known and unknown risks uncertainties and assumptions, if any such risks or uncertainties materialize or if any of the assumptions prove incorrect our results could differ materially from the results expressed or implied by the forward looking statements we make you.
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 correct.
Other information on these and other factors that could affect our financial results is included in filings, we make with the Securities and Exchange Commission from time to time, including the section entitled Risk factors in our most for you.
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 not as.
As substitute for or superior to measures of financial performance prepared in accordance with Cowen.
Conciliation between GAAP and non-GAAP financial measures is available in our shareholder letter earnings release, and Investor data sheet on the IR website. Please keep in mind that wed like to allow as many of you to participate in Q&A as possible.
Associate that will take one question at a time. Please rejoin the queue. If you have another question or a follow up and we will do our best to come back to you later in the session.
With that I'll turn the call over to Scott for opening remarks.
Yes.
Thank you for joining us today.
Already readiness shareholder letter, we delivered another solid quarter of financial results and continue the steady drumbeat of innovation to help our customers transform the way they look.
We've just dropped $2 23.
Our vaccine conference, where we gathered with thousands of customers and partners.
The investing community has never been stronger and enthusiasm for our product announcements with unmatched.
We introduced a lapping intelligence.
Eventual team.
<unk> AI technology, and Leverages, the Watson platform to accelerate customers, what why that is tailored to them.
With 20 years of knowledge, reflecting how hundreds of thousands of software.
My opinion business same client tracking deliver work.
Asking intelligence is like a floodlight gliding up new customer inputs.
Are you starting to see how our customers.
With potential and strengthen our competitive advantage.
In addition to walking intelligence, we also announced exciting new features and platform enhancements, including Pumpkin Blackboard databases.
Roughly 50000 users and beacon, our new threat detection and mitigation products.
I have a few.
It's incredibly exciting to think about the opportunities we have in front of us with unique features and capabilities. So that the intelligent platform innovation, we're delivering customers are more enthusiastic than ever.
To migrate to the cloud.
And we look forward to helping them on that journey.
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.
Good luck to withdraw from the queue. Please press star followed by the state.
Your first question comes.
From Gregg Moskowitz from Mizuho Securities your.
Your question please.
Okay. Thank you very much for taking the question good afternoon, everyone.
You mentioned in the shareholder letter that the Q4 guide includes an assumption of increasing headwinds for churn and for premium edition Upsells, even though you have yet to see a significant impact in those areas and I think that's prudent but wondering if you could contextualize. This a bit more for US for instance are you baking in a modest incremental headwinds or would you say that it's more substantial than that.
Yes, Thanks, Greg really no change to our guidance approach that we took back in February when it comes to the cloud guidance, specifically that cloud guidance range assumes the macroeconomic environment gets worse in Q4 and year to date trend lines continue into Q4, you are right to call out. The fact that the low end of that range not only assumes continued weakness.
The two drivers that we've seen to date around paid seat expansion at existing customers and free to paid conversion, but it also does include some macro impact to areas that have held up well year to date like churn up selling migrations. So we do expect an adult in pretty substantial macroeconomic headwinds at the low end of that range. The other thing.
I would call out really quickly is if you take that Q4 guidance. It puts our full year FY2023 cloud guidance at 37% year over year, that's squarely within the range of 35% to 40%. We provided in February so really no fundamental change overall in our cloud outlook or our approach to guidance.
Thank you Joe that's helpful.
The next question comes from Brent Thill from Jefferies.
Your question please.
Joe EMEA grew 22% this quarter I think last quarter was 30%. It seems like you had some weakness in the region can you just give us a sense what.
What happened there.
Maybe industry too much into the numbers, but anything to call out there.
Yes, awesome, Thanks, Brent and great to hear from you I'll start and then I'll, let Cameron chime in.
<unk> revenue trends tend to be quite volatile quarter to quarter than the U S. And the reason for that is pretty simple EMEA has been slower to adopt the cloud. So there is more datacenter revenue in the EMEA sales mix and do you see as you know is inherently more volatile for two reasons. One is revenue recognition, 20% of DC license value is recognized upfront.
And then secondarily customer purchasing behavior around data center pricing changes also create some volatility so I wouldn't read too much into that it's typically just a function of quarter to quarter volatility, but I'll pass it to Cameron for more of the customer insight.
Yes.
Given what Joe said, there, but I would like to speak just to the cloud adoption in EMEA.
Obviously, we do see cloud adoption lagging behind the U S in the Americas, but in general over the last year as we've done things like data residency in.
And Germany, as well as higher requirements for band fee for financial services organizations, we've been able to see more and more of our larger customers in Europe choosing to go to cloud, we actually worked with a very large.
European Bank over the last few quarters or a few months of getting them to sign up for cloud and we're starting to migrate them today. So I will see that although they are lagging we're seeing that adoption continues to increase.
In line with the numbers.
Thank you.
The next question comes from Keith Weiss from Morgan Stanley . Please go ahead.
Excellent I was hoping to sneak in two questions one kind of more tactical and short term in nature and one longer term on the short term. This is going off of Greg's question I think what a lot of people are trying to understand is what the shape of the quarter was and how demand held up through the quarter.
And whether that influence sort of the more conservative Q4 guide maybe.
Maybe if Kevin gives us a view on kind of like how the quarter progressed.
The longer term question comes from sort of I.
I think the debate that all of US are having around my body language models in general today, AI on whether theyre going to be disrupted or <unk>.
Complementary to a lot of the existing businesses you guys have already rolled out.
Functionality when it comes to your circuit.
The Ikea stem side of the equation. So how do you guys think about that question of that Thats sort of the risk of being displaced by people utilizing these new technologies versus your ability and whats going to make you sticky and being able to.
Benefit from them and does that necessitate at all kind of changing the pricing model moving away from the per seat pricing model maybe.
Better sort of account for the value that you are adding that doesn't take place with the with the agent itself. It takes place on the platform.
Actually doing a lot more of the work.
Thanks for the question Keith This is Joe I'll take the first part with Cameron and Michael Chime in on the second.
In terms of the linear nature of the quarter, we did not see anything unusual about the linearity of our billings in the quarter, nor did we see anything unusual in the month of April where trends were consistent with Q3.
Okay perfect.
Perfect.
I'd say the only thing is as all of you know we did a price change on our server and data center licensing in mid February that of course causes some behavior throughout the quarter, but no nothing significant throughout the quarter beyond the reaction to the price changes.
Mike.
Yeah.
Okay. Thanks case, Greg Great question.
Quite clearly what I can say from <unk> point of view, we think that.
Last language models as you mentioned is a huge opportunity for us as a business.
If you look at our fundamentals, we've always tried to solve human problems not technology problems right, which means we have a lot of customer knowledge and data entrusted to us over the last two decades.
And as a platform to build on top of the kinase knowledge together and we have a fantastic aren't ATM to build features on top of these things. So AI allows our customers to be significantly more efficient.
To get to our mission of unleashing the potential of every team that's what we believe a little bit so from our point of view.
We think our best opportunity to grow our business through the Atlassian chosen feature set is to drive customer growth Brian .
Brian .
We have a goal of in the long term winning a fortune 500000 knocked a fortune 500, and we think that these technologies.
He will help us.
Get that.
That's why we are including the features in all additions rather than as a separate SKU.
It's not a good customer experience and we think it will slow adoption.
Put it that way around.
We also obviously have a major trend as you roll.
The migrations to the cloud in our business.
Our largest customers.
The center.
Have the most amount of knowledge and data built up over time, but you can see they can get the most amount of efficiency and with this feature set being only available in the cloud. It's a further raising sensor migrate will bring forward the migrations.
And as we know that the.
Migrated customers have.
Really great economics for Atlassian faster expansion rights et cetera. So that's the reason we're looking at it that way fundamentally yes, a huge advantage for our customers, which is why we're in this business in the first place.
And secondly.
We're looking at growing our license business.
Western intelligence that you said.
Awesome I appreciate the color.
Your next question comes from <unk> from Citi. Please go ahead.
Well good afternoon, and thank you for taking my question.
And Mike maybe for you or Scott.
J Jill service management product Polaris, a lot of activity in action and really.
The use cases that Jason can be deployed in just a few around external customer support.
Emily or with certain vendors in that market.
And to really drive more <unk>.
<unk> scale in GSM in particularly in the context.
Your very large customers.
Our working whaler headcount retrenchment process, where data can be.
Gary.
Deflationary investment and then a quick follow up thank you Allison.
Sure I can I can certainly take that for you.
Consumer book.
We remain incredibly bullish on our position.
In ASN spices, and obviously tier service management is a huge part of that.
I think as customers naturally.
Looking to be more efficient with their spend.
In a more turbulent economic time.
That would lead to advantages in jury service management, and we're continuing to push those.
We've invested heavily with Atlassian intelligence feature sets and virtual license and all sorts of other technologies that make customers more efficient more efficient fundamentally allow them to process more.
Requests.
Date per hour with how can we get accustomed fidelity as well.
So that's one of the reasons we're incredibly.
Bullish at the moment second is zero service management just to remind people.
Atlanta predominantly in <unk>.
But it does have a great expansion story to other parts of the organization in terms of like HR finance marketing.
Legal areas, which are fundamentally service driven parts of an organization.
I have with customers being other parts of the organization.
It has long been our thesis again, our fundamental philosophy is that there are far more agents, we believe inside of the company than other companies I think all the other vendors thing.
We're not just targeting the <unk> that said, obviously, we have a wonderful landing spot through the development organization and expansion and we continue to see that throughout the quarter as customers increasingly use zero service management outside of <unk> and that's a long term growth factor for us.
Okay appreciate that detail.
So the question for you was just on the cloud trajectory.
This had been grappling with how that segment.
Jesting and absorbing the pretty meaningful moderation, we've seen in <unk>.
<unk> and I know you alluded to in your shareholder letter that churn levels necessarily have not increased.
But can you help us sort of understand or at least.
Maybe put some sort of a downside cap on.
How youre thinking about that Diana clear you are really actively trying to manage growth.
Thanks Terry.
In order to support that growth in that guidance.
Yes. Thanks for the question for <unk>, when we look at the churn rates, especially customer churn.
Been very consistent and stable throughout the year that suggests theres nothing thats changed from our structural competitive position.
Customers continue to come to our site try our products our monthly active users are free instances.
All of that seems very healthy and strong so churn has not been a big issue for us. The primary driver of the pressure that we're seeing in that cloud segment is really around paid seat expansion at existing customers and the free to paid conversion rates that we've talked about the remainder of the business, whether it's migrations or upsell or cross sell.
All of those drivers pricing, although drivers continue to be very healthy from our perspective so.
That's really been the core issue that we've been we've been working through.
Thank you.
The next question comes from Michael <unk> from Wells Fargo. Please go ahead.
Hey, great. Thanks, Good afternoon I appreciate you taking the question maybe.
Maybe one from me on margin, we entered the year expecting mid teens operating margin you just delivered a second consecutive quarter of 20 plus percent maybe.
Maybe Joe if you can speak to what's driving that uplift and then as a second part at the Investor session. There was a comment around fiscal 'twenty four as a year of continued investment.
So any color on helping us square that with just anything else you're doing to help optimize on the cost side as we're thinking through the puts and takes of margin trajectory and some of the offsets you have within your control. Thank you.
Yes, great Great question. Thanks for asking if you look at our operating margin performance in the quarter, we did outperform our expectations by 6% to seven percentage points.
Five points of that was driven by lower operating expenses and better operating leverage those operating expenses were favorability was driven in two primary areas first we had less than expected payroll related costs from lower bonus expenses and head count, including about $10 million in savings related to our restructuring and then secondarily, we had less than <unk>.
The discretionary costs in areas like professional services and <unk> as part of our plan that we discussed earlier in the year to be responsive to the macro impact on our business and align our cost structure with revenue growth.
I'll, let Scott talk to the comments of $2 23 of the last point I would make just as the focus for the team has been around maximizing the return on every dollar spent making disciplined prioritization and resource allocation calls and driving operational efficiencies and I really believe the team has done a really good job this year of executing across those three things and that's what you see.
Showing up in that operating expense favorability.
Scott.
Yeah, just to reiterate what you had mentioned Michael.
That's the call went out being conference.
Yes, we did say that.
Thank you Paul.
Investment year, we still see huge opportunities out there in those areas, we talked about migrations enterprise ICD 10 that would be.
<unk> aggressive in investing.
In behind and we expect those investments to continue through FY 'twenty four of course affecting the account opening process.
Thank you.
Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.
Hi, Thank you very much just.
Just a quick couple of <unk>.
Introspective questions here, but cloud growth rate is certainly looking to do.
If we set for deceleration in Q4 as you look at next year is there any reason to believe that cloud growth rate could reaccelerate at some point in fiscal 'twenty four based on your assessment of timeline of migrations and the product readiness.
As it relates to regenerative AI.
I'm wondering if you can and it's been hard to get clarity.
Company managers, because it's such a nebulous topic.
Ask your liabilities can you prognosticate. If this will mean that you will need fewer developers and fewer service people and therefore, there is the idea of a shrinking Tam, but then you gain share relative to the Tam because your technology will allow.
Displaced workers that did not have <unk>.
Or is it.
Gross supply because of the number of developers to nicely grow because the barrier to a software development comes down so people like me can start to vote.
Awfully that should not be the case, but.
How should we think about the Tam implication from a head count perspective as it is a result of Canada and what it does for developers and service people. Thank you so much.
Hey, Kash. This is Joe Thanks for the question, obviously, we aren't providing specific quantitative guidance on FY 'twenty four but I would offer up the following of how to think about it directionally specifically as it relates to the cloud space with.
But the big caveat I always offer here is on revenue Theres, a lots of moving parts, but the biggest being the macroeconomic outlook, which is highly uncertain and as you've seen in FY2023 that can have an impact on our business. We are not immune to those factors.
Macro I'd have you think about the following mathematically we will have easier comps as we move through the next year.
We will have a significant event in the second half of the year with the server end of life and our focus there is really on migrating those customers to either our cloud preferably or data center offerings.
We will also have some benefit from pricing as prior price increases and less loyalty discounts layer into the model and then lastly, the decisions that we've made this year, Rob rebalancing and re prioritization to reinvigorate revenue growth will begin to land and have positive impact as we move through FY 'twenty four or so in the end macro is going to play a big role and we'll see what that <unk>.
Ultimately brings but hopefully that helps you think through some of the other dynamics that will relate to cloud revenue in FY 'twenty four.
Mike.
Yes, Kash I can chip in if youre, if youre looking for prognostication.
Probably my my column.
I would answer it two ways.
Firstly.
Sure.
The software World. If you want to think about it you ask if there's going to be less developers et cetera.
My view in our house view I suppose is known.
Brian the simple answer to that is software is not.
Demand constrained it is supply constrained, we actually constrained by the supply of developers in the world not the demand the number of ideas for pieces of software we could create so when you create.
Tooling that makes it possible for efficiency of any form.
Will suck up more of that demand with the existing supply.
The supply will go down the number of developers I don't think he goes down that that's not the way sort of human creativity, which is ultimately there are the software works.
Secondly.
When you make software developers more efficient if you're talking about artificial intelligence a lot of language models with government assistance in writing code et cetera trading costs of software.
That.
It makes it far more software.
The most software there is in the world that's good for Atlassian in a generalized sense.
We're not necessarily working on individual developers again.
Is there a software they are about a quarter of the audience software developers. The more software you have the more need you have to still.
Designers and program managers, and making sure that we have the right software that we're building.
A lot of stuff with upright run manage so the most software there is in the world.
That's generally I think a good thing for Atlassian, there will be puts and takes across across this world as it flows through but.
Does it remind my two fundamental points that we maintained incredible optimism for artificial intelligence and what it can do for us as a business to help.
Unleash the potential of our customers to help them create and manage more software and that that market about phosphate market.
Thanks, Mike I will learn to code.
Your next question comes from Michael <unk> from Keybanc. Please go ahead.
Hey, guys I wanted to just talk about data center versus cloud you are seeing that some of those impacts on expansion of free to paid impacting cloud.
Data center beat in the quarter it sounds like Youre looking for only a minor <unk> and data.
Data center going into next quarter. So could you tell us what's supporting that growth on a relative basis versus club.
Yes. Thanks for the question Michael This is Joe Youre right data center had another strong quarter of revenue growth accelerated to 47%.
And was better than we expected and that was primarily driven by two things stronger than expected renewals and better than expect expected seat expansions at existing customers. We were helped a little by deal pull forward, resulting from the price change in February but it was largely consistent with prior year and only slightly higher than our expectations and certainly not nearly as significant or a pronounced.
As it was two years ago.
<unk> said that migrations from data center to cloud remain very healthy year to date over 50% of cloud migrations are coming from data center and that's up from about a third a year ago. So we've got good progress there as well and then in terms of the guidance, we do expect growth rates there to moderate a little bit in Q4 and beyond and that's really driven by increasing migrations from data center.
And cloud and server to cloud as we remove migration blockers and add compelling features and value to our cloud offering and then secondly in the data center, we are starting to lap strong prior year Comparables in Q4. So that's another factor in the growth guidance that we've given.
Hi, This is Cameron.
Okay.
I'll, just add a little bit on the data side.
Just largely basically talking to customers we were at $2 23 on the roughly three weeks ago or many of our largest customers are there and many of those customers are still on data center have been on data center for many years now to say just the tone with those customers over the last few years.
I'd say last team there three years ago three years ago. It was always about like why should I move to cloud what are the capabilities are you going to get into my data privacy requirements you name it.
Say that tone. This year, just talking with all of those customers is okay. How do I get there right you delivered the new AI. We have these new functionality were bought in now help US guide us through this plan and I just think that overall total shift has been super positive and helping get more data center customers moving to cloud going forward.
Your next question comes from Keith Bachman from BMO capital markets. Please go ahead.
Hi. Thank you my question relates to what Cameron was just talking about as you think about just philosophically in FY 'twenty four would you expect data center to continue to outgrow cloud.
Or.
Do the comparisons and some of the other feature set. Thank you were just talking about and then underneath that.
You've talked pretty consistently about.
Cloud is getting the benefit of 10 points of growth associated with conversions as you think about.
What happens is that 10 points as you anniversary or getting beyond the server date, which is.
Mid fed a year away from now does that cloud conversion go to zero or is there continued benefit as you migrate longer term from data center to cloud when you in fact, perhaps move to enterprise.
Version so in other words is there.
Still a longer term benefit of cloud conversion or is that 10 point to go to zero. Thank you.
Thank you so as the Kamran I'll talk to just largely the customer choices ahead of us and Youre absolutely right. So server end of life. It goes into effect February of next year, and we still have a variety of server customer still sitting out there on a variety of sizes that are effectively need to make that choice between now and February and many are doing it month by month, obviously many are going to.
Until the last minute to make that choice.
They do have two choices now obviously, we're going to lead and try and get as many of those customers to choose cloud, but obviously, we have data center is a very strong capable version for them going forward. So I see that continuing to option out them closer towards labor, we will still have a sizable data center customer base on which to continue to migrate customers to the cloud. So this migration journey that we're on.
Stop February of next year. It is a multiyear journey as we continue to get all of our on premises customers eventually to the cloud.
Yeah, Thanks, Kevin I would say nothing more to add to that beyond we continue to invest to grow and accelerate that migration to the cloud, we're removing blockers were making migration easier through tooling and support investments. We're also closing the gap in pricing between advantage pricing on DC in <unk>.
With our overall pricing strategy and just overall the cloud platform provides the best experience, whether it's analytics or automation or AI or cloud collaboration and better Tcs. Those factors will only increase over time and then just to reiterate what Cameron said Theres a lot of runway left on that cloud migration story, and we expect to continue to see that even.
After the server end of life.
Okay perfect.
Okay.
Your next question comes from Brad <unk> from Macquarie.
Please go ahead.
Thank you very much.
Wanted to ask about Beacon actually caught my attention in your shareholder letter.
<unk>.
Question early access product that shifting and focusing a bit on cyber security as it relates to Atlassian cloud ecosystem seems an interesting adjacency here I'm curious with this early access program are you seeing signs that there is demand across your customer base for just a broader set of cyber security solutions is this something that you think is.
Specifically <unk> and is there any sort of scale of customer that is particularly applicable to.
Thanks for the question, it's Scott here.
Just sort of model.
So firstly the big demand.
You put a product from atlassian from our customers, particularly at our user conference and.
Customers are excited by this and if you think about cloud customers want to make sure that the secured and the things that we can do.
We can do and we can see the shape of usage.
That allow us to work with our customers on flagging things that might be of interest to them.
A reminder, that this is not a generic security product is across our data and our cloud now we have advantages because we have one platform in the cloud and we can offer a bacon across.
Most of our products. So there's an advantage there from a sort of consolidation perspective and from an <unk>.
And why you're seeing us gain access on the <unk>.
Zero organization side.
This is really a product to help.
Customers be very comfortable.
How they got it gets used in the cloud and in most cases, where we can offer here is again ahead of what either.
Customers could do themselves behind the firewall.
And so it isn't just yet another example of how the <unk>.
<unk> overall better for our customers the more they can do themselves and another reason for them to migrate.
The next question comes from Alex Zukin from Wolfe Research. Please go ahead.
Hey, guys. This is allen on for Alex Zukin.
I just wanted to ask a financial question, if I think about the shape of NR or through the quarter. I noticed is that a metric you guys report too, but just to better understand the growth that youre seeing in the business can you just at a high level talk about what that shape look like through the quarter and through April .
Yes. Thanks for the question. Unfortunately, no specifics to share with you today on the IRR given the macro pressure in headwinds, we do see pay seat expansion it is trending lower.
There was nothing unusual about that trend in Q3 relative to Q1 and Q2 those trends just continued into Q3.
And I'd say lastly, the underlying fundamentals in our business remain very strong we see no change to our structural competitive position. So we do expect those retention rates to recover once the macro picture stabilizes and improves.
Got it okay and just as a quick follow up I appreciate the color on the guide for Q4 of cloud growth.
Benefiting 10 points from migration.
Just don't have the numbers correctly here do you mind, just kind of telling us what that exact benefit was in this quarter in the last two quarters or so.
Thank you yes.
Distantly said, we're getting overall approximately 10 points of revenue growth in the cloud business from migrations that hasnt changed dramatically throughout the year.
Your next.
Churn comes from Ryan Macwilliams at Barclays. Ryan. Please go ahead.
Thanks for taking question.
Just on the vertical standpoint, any verticals worth calling out that may have impacted the quarter or the guide.
And at this point do you have a sense, maybe what percentage of server customers might choose to remain on server even past the end of life.
A couple of quarters out there. Thanks.
Yes. This is Kevin I'll take that.
Just from a customer perspective, as we mentioned with over 250000 customers and across all industries geographies or size of all type, but we see that as kind of a massive competitive differentiation for atlassian, giving us plenty of growth opportunities across the customer base for quite some time.
Of course, the the trends we've seen in seat expansion is slowing down is broad based across the entire customer base that we see today.
One advantage we have is that as every company starts bringing in more and more technology to deliver value to their customers. We obviously you have to take advantage of that as we are helping companies with technology and some business seems to work better together going forward.
And then the second part on the server end of life thing.
Most of those customers, we see that there will be something that is a perpetual license there will be some customers we believe that.
Most will choose cloud some will go to data center and obviously some will continue to use the server licenses on supported just about every customer size that I speak to largely is under a compliance requirement or just general IC guidance. This internally that they do not run on supported software and that will be choosing cloud or data center post the end of life. So I really see it as a very small portion of it.
The customer base.
Your next question comes from Adam Tindle from Raymond James Adam. Please go ahead.
Okay. Thank you maybe one for micro Scott was going back through my notes from this time last year, you announced free editions of cloud products and you talked about it echoing an approach from OE dollars nine where you broaden your customer base by offering a $10 starter license. So if we fast forward one year later your customer count is still growing so youre certainly.
<unk> the base like you did in <unk>.
Question would be maybe take us back to the upsell motion from the starter license and compare and contrast that to Upselling from the free cloud. What you learned then and what you can apply now to improve cloud upsell.
Thanks, Adam.
Great question.
Ill, just remind folks who haven't followed the lofty story.
Long time back secondly, I'll add a non financial downturn.
We introduced create integrations available.
Back then.
And $10.
I guess it was really well we introduced back then were $10 and you've got end users of our products down from what was a couple of thousand dollars without lowest cost at the time, but very disruptive pricing changes and that was a long time quite broad because we.
And the type of people that previously buying thousands of dollars without buying it $10 to get a version of our software.
The good thing that that has that open the funnel up to a whole bunch of companies that otherwise would not.
Consider that product and over the long term.
From 10 to 11 to 12 users and then start paying up on a different philosophy.
So echoing that.
Covid.
Time period, a couple of years ago, we introduced basically free versions of our products down from $10 a month in the cloud down to free.
And so when we saw that the funnel at the top of our.
Customer acquisition side of things and so the natural question to ask well then how do you can get more of those three.
And how do you change that cycle.
That is something we do look at.
But honestly most of our freedom.
Great of hydrogen based on usage and based on top of value in changing from 10 to 11 users and.
One of the advantage of the Alaska business model with the customer pilots as they start using more about features and regarding spend a huge amount of entity chronic call them trying to encourage them you could waste a lot of money.
Doing that and so what we do it's been a lot of time looking at the.
The levels at which we charge for things and make sure that it would be appropriate guidance and make sure we provide value to our customers and sorry, if I use that product more and more.
<unk>.
When you get to the value add.
As they increase their usage now.
Not only have we done.
Free.
At the start of Covid, when we saw a couple of months ago more interesting and macroeconomic times, we decided to go harder on them on that Jack I'm offering where we make it cheaper.
Cheaper at the low end.
And for competitive migration, so people that were switching out from other hyatt lifestyle offerings and sorry at Alaska Telecom talks about the price rises that come through very positive cycle.
Cycle, but we also spend a lot of time looking at how do we make it cheaper at other areas like in order to more aggressively get market share and so for us. It's a long term play about gaining market share and not really a short term sugar hit of chronic thing.
Mr. <unk> in any particular given time period.
Makes sense. Thank you so much.
Your next question comes from Kate away from Bernstein. Please go ahead.
Thank you.
I guess, there's two parts to this kind of both focused maybe on our call on even with new customers.
You certainly had a nice uptick this last quarter relative to the prior one on.
Net new customers.
And I guess, there's two parts of it one is we were.
Backing out in our model what portion.
Uh huh.
Kind of new revenue growth was coming from the tune. It looked like you were probably seeing kind of flat quarter over quarter revenue contribution from kind of new customers over the trailing 12 months and most of the headwinds are really coming from.
Existing customers.
Does that seem about about right.
New customers were probably kind of like flattening and it was mostly the existing customer expansion that had been the issue.
Yes. This is Cameron I'll speak to the net new customer number.
As we said before the new customer number does jump around from quarter to quarter for a variety of reasons.
Very glad to see the increase from Q2 to Q3 with over 6500 net new customers. It's showing that there is continued demand for what we have that we still can convert those free customers to paid customers and it's nice to see the quarter on quarter increase.
However, I do want to call out that that challenge that we've been mentioning for the last few quarters of our conversion rate from three plants to paid plans is still lower than it was historically before we saw these macroeconomic headwinds.
As far as that new customers impact into our short term revenue it is minimal.
And today, we're we always focus on the net new customer overall number is really a better guide for our long term portion of our business.
Your next question comes from Ari Johnny <unk> from Cleveland Research Your question. Please.
Hi, all thanks for taking the question just a question on the cloud growth and expectations here.
One given the strength in data center, you called it out as better than expected in the quarter does that suggest potentially that future migration to cloud may not be quite as pronounced given customers are renewing on data center more than you had expected.
And second I believe in the shareholder letter it was called out for the first time, there was an impact from seat count reduction.
Do you believe that more reflective of layoffs that are being that are occurring today or more reflective of the layoffs that we saw last year.
Yes, multi part question here. This is Joe I'll take part of it and then Ken will chime in I'd.
I'd say in terms of the data center to cloud migrations not at all we expect those to continue to be strong for the foreseeable future Cam spoke earlier about the multiyear journey. We're on we continue to add a ton of value in the cloud we continue to invest in migration tooling and customer support we continue to invest in data residency and scalar.
Ability and certification and extensibility and all the things that are going to enable more customers in that data center category to move to the cloud. So we remain very bullish on that opportunity.
Ken do you want to take the next part.
Yeah ill just clarify the gist.
Where we see customers choosing datacenter is further investment and Atlassian and.
Our multi year journey of getting customers to the cloud is very much on track with our expectations.
Increasingly improve our ability to migrate customers every single day.
As far as your bench on the seat count reduction in.
In general I'd say the biggest issue that we focus on is the is the paid seat expansion and customers are still expanding their seats. It's just not at the same rate that we saw before the macroeconomic headwinds of course, there are a subset of our customers a very small subset that have reduced their employee count over the last few months and when theyre renewals come up they're renewing at a lower tier then.
Then what they previously right now because they have Leslie your users in their business, but overall that is a small overall percentage of our customer base. The bulk of where we focus is really the <unk> expansion.
Your next question comes from Jay <unk> from <unk>.
Greg. Please go ahead.
Yes, thanks for taking my questions just wanted to double click on that the data is.
And our strength you saw in the quarter is that more result of your customers starting to land there or upsells within existing customers or is that really just the server migrations going more towards D. C than you expect in the cloud and then more of a high level, one, but what's driving the seat expansion for DC versus the headwinds for cloud is that primary.
As a result of the enterprise focus in D C.
Yes. Thanks for the question. This is Joe as we discussed earlier when you look at that DC strength and resilience, it's really driven by two things better than expected renewals and then paid seat expansions at existing customers.
Jim.
Yes, I have to say, it's just in the quarter. We have to remember we did do a price change on data center and that causes customers to make a choice whether they if they're thinking about adding users in the future there its a good compelling event for them to choose datacenter, but once again we.
We see that path to data center, we prove it again and again, we have the ability to move data center customers to the cloud over the last year half. The seats. We have moved to the cloud are from data center customers. So we see this is within the quarter. It's fantastic people choose data center, because that's great. We can eventually get them to cloud and we're proving that everyday.
Thank you.
And that concludes our question and answer session.
I will now turn the call over to Mike for.
For closing remarks.
I just wanted to say thank you everyone for your questions. Thank you to those who.
<unk> came to our <unk>.
Analysts function at $10 23.
Hope you all have a fantastic rest of your day.