Q4 2023 Atlassian Corp PLC Earnings Call
Recorded and will be available for replay from the Investor Relations section of Atlassian website. Following this call.
I will now hand, the call over to Martin Lam Atlassian as head of Investor Relations.
Welcome to <unk> fourth quarter and fiscal year 2023 earnings call. Thank you for joining us today.
Joining me on the call today, we have <unk> co founders and co Ceos, Scott Farquhar, Mike Cannon Brookes, our Chief revenue Officer, Cameron dish and Chief Financial Officer, Joe <unk>.
Earlier today, we published a shareholder letter and press release with our financial results and commentary for our fourth quarter and fiscal year 2023. This.
The shareholder letter is available on that lock ins 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 managements insight and commentary for the quarter. So during the call today with brief opening remarks, and then focus.
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.
We're looking statements represent our management's beliefs and assumptions only as of the date such statements are made.
And we undertake no obligations 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 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 the call today, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with GAAP a reconciliation.
Asian 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 to facilitate that will take one question at a time. Please rejoin the queue. If you have another question or follow up and we'll do our best to come back to you later in the session.
With that I'll turn the call over to Mike for opening remarks.
Okay.
Thank you all for joining us today.
As you've already read in our shareholder letter, we delivered a strong quarter of financial results. We closed out FY2023 with great momentum in cloud migration and enterprise and across all three markets with.
We generated over $3 5 billion in revenue this year and over 250000 customers now power that collaborations on our world class cloud platform.
Amidst a challenging year, we're extremely proud of all that we've accomplished we said we'd play offence in FY2023 and that's exactly what we did we.
We migrated millions of users to our world class cloud platform, we built game changing innovations such as Atlassian intelligence launch new products like Juul product discovery delivered increased scale on our cloud platform and unlock data residency in new locations like Germany, and Singapore for our global customer base.
Looking deeply with our customers with more and more excited about the value Atlassian intelligence will deliver.
By leveraging the latest advancements in large language models combined with each customers unique data.
And our World class cloud platform without.
With our two decades of data driven insights into how teams work, we'll be able to further unleash each of our customers potential across all three markets.
Today, we're seeing a better payoff and that strengthen strengthening our conviction in our strategy.
As we enter FY 'twenty four we're eager to get after those large opportunities.
And believe we are well positioned to come out of the year even stronger.
With that I'll pass the call to the operator for Q&A.
We will now begin our 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 Michael <unk> from Wells Fargo Securities. Please go ahead.
Great. Thanks, I appreciate you taking the question Joe.
It's your first full year guide, maybe you can start by walking us through the process there the visibility into and confidence in framing those targets.
Targets for fiscal 'twenty, four and there is some commentary in the letter just around the proportions you are expecting between data center and cloud and just some details in there I think it's useful to bring to the front of the call. So anything on just the signals you are watching and how the end of life of that is taken into account all very useful. Thanks.
Great. Thanks for the question I think that's it start with our cloud revenue guide of 25% to 30%.
It assumes the macro headwinds in FY2023 persist into FY 'twenty, four and migrations from server and data center will continue to be strong contributors to cloud growth approximately 10 points. So we do expect the momentum that we've seen in 'twenty three on that front to continue the low end of our cloud guidance range assumes continued macro weakness throughout FY 'twenty four as well as some back.
Crow impact to areas that have held up really well in FY 'twenty, three like churn and upsell on migrations.
We do expect cloud revenue growth rates to gradually improve throughout the year driven by the easier prior year comparable that we have in the second half of the year.
Now you mentioned data center in terms of data center, we do expect decelerating revenue growth rates in FY 'twenty four driven by a few things first and foremost lower migrations from server following the server and the support we do expect greater migrations from data center to cloud as it removes migration blockers and enhance our cloud offering and then of course datacenter has difficult prior year comparables in the second half of the year.
And then finally, we expect a steep decrease in our server revenue up to end of support in February 2024.
At which point, we will no longer recognize any further revenue so.
That's a general outline of how we're thinking about that for for next year.
Your next question comes from Keith Weiss from Morgan Stanley . Please go ahead.
Thank you for taking the questions.
The key one.
The challenges in the last couple of quarters.
We can paint conversion the lenders and guess what that was.
Sure.
Sort of the impact again this quarter I just wanted to get it as we go into next year, just wanted to get a sense.
What does it take.
Ignite growth.
Thank you and the customer base.
A better macro or these things on the funding side.
Yes.
Thank you.
Okay.
Hi, This is Cameron I'll speak to the new customer number.
So in Q4, we definitely saw.
That continued downward pressure on our free to paid conversion that we've been speaking about largely through the last four quarters or so.
Tim.
Though we do continue to increase the total number of free customers out there in the pool and serve those customers year on year and simply those customers are slower to take off from credit card and purchase our software, which is fine we can be patient and convert them over a longer period of time.
The bigger shifts that we saw between Q3 and Q4 was actually due to something that we have full control of as we look to our budgets and we were very diligent with all of our budgets this year, but we really.
Went into our marketing campaign spend in marketing campaign budgets and look at ROI of those investments based on a deep dive of that analysis, we were actually able to redirect some of our top of funnel spend towards higher value longer term customers.
The ear was.
We got less customers overall in the funnel and converted to paid customers.
Q4, but the customers we did bring in we will be at the higher longer term value higher RLI customers for that marketing spend.
Going forward as Joe already mentioned, we do continue to believe that the macroeconomic pressure against the free to paid will continue but we will always be optimizing our marketing spend for the highest ROI possible and where we see good ROI, we will put more investment behind it.
Your next question comes from Arjun Bhatia from William Blair. Please go ahead.
Okay. Thank.
Thank you guys for taking the question maybe.
Maybe one for Cameron or Joe.
Just as you're thinking about how fiscal 'twenty four plays out.
Should we think about the cadence of the migrations that are left as we approach. So February end of life and <unk>.
Maybe this one's more for Cameron, but who are the customers that are still left.
On server data center skew smaller or larger or anything you can give us there.
Helpful. Thank you guys.
Thanks, George and this is Joe I'll take it first and then Kevin can can chime in at the end.
As you mentioned, we ended support for our server products in February 2024, our focus there is obviously on migrating our remaining server customers to either our <unk>.
<unk> or data center offerings.
We expect that there will be uncertainty in quarter to quarter variability based on when and how our server customers ultimately choose to migrate for now we're assuming the trends we saw in FY2023 with respect to how many servers seats migrate and where they migrate to will continue in FY 'twenty four directionally through end of support and that had end of support we expect most of the remaining service seats that migrate well Mike.
A data center and we've also built appropriately prudent assumptions for customers, who will choose not to migrate in FY 'twenty four into our guidance and we'll be able to share more on quarter to quarter assumptions related to that server end of support dynamics. When we provide our Q2 guidance next quarter Kim.
Yes.
Adding to that I, just want to highlight that this entire transition since we announced at the end of the server support almost three years ago has been a multiyear journey and a multiyear investment across all factions and the last thing whether its go to market and getting closer to our customers whether it's ours.
Randy teams, eliminating cloud blockers delivering scale certifications humana and of course, the variety of programs, we've rolled out from price changes to loyalty discounts and of course. This large compelling event with the end of the server support coming up in February .
It's been a multiyear journey and as we've been saying, we're very been very consistent and very happy with our performance along the way we've been able to retain a very large portion of our server customers, while getting our customers to choose cloud or data center appropriately.
We have about six months Mark.
We come up to February .
Have a significant server customer base still out there they are all shapes and sizes to say, but they are the ones who waited in the last the latest to make this choice, which is perfectly fine. The good part. There is we are in a better position than we've ever been to help those customers make the right choice for their company and transition.
As quickly as possible, obviously will incentivize our customers to choose cloud first and foremost and all of those conversations but data center around that of course is there and honestly a great option for some customers out there who simply are still not ready to move to cloud as far as who will choose one as Joe said, we largely see that customer choice falling in line with what we kind of.
Over the last year and of course, the customers to wait till the last minute definitely we will have data center as a easy migration path for them if they wanted to stay on Prem.
Your next question comes from Ryan Macwilliams from Barclays. Please go ahead.
Thanks for taking the question two part question here on <unk> cloud results could you maybe provide some context around what the contribution was from migration to cloud growth in the quarter and how should we also think about the contribution from the exploration of the loyalty discount program to that fourth quarter cloud growth. Thanks.
Yes, thanks for the question the.
First part of the question in terms of migrations migrations contribution to growth in the quarter was very consistent with what it's been in the past I think we've talked about it being approximately 10 points in FY2023.
That was a similar outcome in Q4.
In terms of outperformance to the revenue guide the outperformance was driven by stronger than expected purchasing in June and primarily in enterprise ahead of the expiration of our loyalty discount program and that came in the form of both more deals and higher contract value per deal and it drove strong results in migration seed export and up sell to premium and enterprise versions of our pre.
<unk>.
Across both our cloud and data center businesses and that drove the outperformance there the server outperformance in the quarter was driven strictly by stronger than expected renewals and larger deal sizes and then finally marketplace outperformance was driven by a pull through on the stronger cloud datacenter sales I noted earlier I hope that helps.
Yeah.
This is Cameron just from a customer perspective, I just want to say that none of this was really a surprise for the customers.
Been very open along the way for the last few years about how the loyalty discount program would be staging down over three years and going away entirely on July one.
These customers largely we've been working with them for many months, sometimes for these bigger customers for years.
Knowing that the state was out there and given our large compelling events to make that choice.
Of course as I already mentioned, we still have another big data out there with next February and will continue to work with our customers who still remain on server between now and then.
Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.
Hi, Thank you very much I was curious if you could just comment on.
The transition we've had a transition of sorts in the company.
Zero transition how are you approaching that.
Next year's planning are you looking for a new leader within the company hiring from the outside one of the considerations on that transition. Thank you so much.
It's Scott here.
Huge thank you to camera employees, our revenues at Atlassian.
Cameron is done.
Our job at Atlassian.
John .
Marketing and great sales and now eventually what these after running all of our sales and marketing.
And a critical job.
When we chatted about this has been the right time for the camera does get back because the cloud migrations and end of life, etc are going so well sorry.
The right time to Canada.
It's a critical time bosky given it goes up and at the moment.
Sensitive what happens going forward Cameron has some really strong <unk>.
Inside the business, particularly on the sales side.
It's been a leader that runs most of the sales organization at the moment and so we expect that to be a strong continuity.
That leadership.
This stage, we're not saying exactly how that Ron will be replaced or rebuilt on that but.
You don't expect there to be significant changes from what we've got them fast.
Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.
Okay. Thank you for taking the question and best wishes to Cameron for Micro Scott you were very clear at the Atlassian summit in April that Atlassian and intelligence would be embedded in all of your cloud editions and be free of charge, but since that time, we've seen several software companies get lab to name one of them.
Our specific pricing for their gen AI attack and so I'm curious to hear your thoughts on the direct monetization plans that are developing in the industry also if atlassian intelligence delivers the value to customers that you think it can could all of this potentially make you rethink your your approach at some point.
Yes, Hi, Greg It's Mike here, Thanks for the question.
<unk>.
Look I would start with our philosophy and long term thinking as a company we.
Clearly believes that.
<unk> intelligence and AI in new models are a huge opportunity for us.
We think that software is supply constrained not demand constrained that will enable the creation and far more software.
We are a content text based business and anything that allows you to manipulate generate pas understand.
Texas is very good for us as a company that targets collaboration and knowledge workers.
We have a huge amount of data across assets of products and connections to third party products and the best of big products in the world.
That is incredibly value for us. So we are huge believers in <unk>.
And the potential of Atlassian intelligence to drive significant value chain for our customers.
Secondly, our philosophy is to lead with R&D to.
To bills, and then customer value before thinking about monetization I know there may be others in the industry. If you go the other way round it announced the price then build something.
Then workout of customers care.
That way we go in the other direction. So you.
You've seen us execute that plan and that play many times over two decades, and that's exactly what we're doing in terms of the Washington intelligence.
We are super excited.
And I believe Youre at say 2023.
One of the best feature set custom.
Customer residences, we've had at the announcement and the launch of what we will.
What we demonstrated to customers huge customer excitement our job now is to turn that into actual customer usage and a huge manner first and that is exactly what we're doing.
Those features and now in the hands of <unk>.
Of the order of thousands of customers.
And we are working every single day to make sure that those features to deliver customer value and actually use.
We do believe they will drive significant product competitiveness.
And unleash the potential of every team, which is what we hear when we hit it.
There are a number of ways, we believe as we've said before that.
Jane economically from the Alaska Intelligence feature set again first and foremost we do believe it will continue to drive significant momentum in migrations of customers from a server and data center products to the cloud.
<unk> intelligence features only exist in.
The cloud and can only exist in the cloud so anything that is a carrot to further improve that migration closed is a good thing for us economically as a business.
<unk>.
Yeah.
Secondly, we do believe it'll drive product competitiveness.
And improve on you to new customer conversion rates and our win rates against competitors in all markets with saying that we have built and lessen the intelligence leveraging.
Cloud platform, which is both world class and quite unique.
This is a great example of why we spend five to 10 years building this cloud platform.
Cause we can ship it lessened intelligence features in every product in every category that we're in every market.
To improve our competitive standing across the board.
And we think that will come back in and new customers and competitive wins out over the medium to long term.
And thirdly summit last one intelligence features.
Enhance and leverage.
Features that are packaged into premium and enterprise editions. So.
So we do believe it will drive. Some addition movement as customers go from free to standard and stand at a premium and premium to enterprise.
Some features do exist in enterprise levels. For example, the Atlassian analytics features that exist in the enterprise edition.
Very powerful set of features to be able to use a lessening of intelligence to generate queries for you is one of the new residents ages, but that will hopefully drive more enterprise edition upgrades. So we do believe theres monetization opportunities for us in licensing.
I'll ask one intelligence in summary.
Philosophically with starting with R&D and building a data set of core capabilities. We believe we can scale for the next five to 10 years as this wave takes over.
While our software.
Secondly, we are focusing on delivering customer value first.
We are doing that every single day, we remain incredibly bullish about this this area of the company.
Your next question comes from Brent Thill from Jefferies. Please go ahead.
Thanks, Joe on the operating margin, you're guiding down 200 basis points year over year and I think in the shareholder letter you expect that that trend to reverse can you can you just walk through that.
The next couple of year cadence and how youre thinking about the investments youre going after and then maybe tie that into that expansion.
How youre thinking about how that plays out thanks.
It's Scott here I'll take the first part about that and Doug can get in with the details.
But as you probably need Atlassian story.
We run a very successful and highly profitable business over a really long period of time, it's kicked off great free cash flow has great margins and about 18 months ago, we identified a set of opportunities where we wanted to invest heavier in behind those opportunities than we have historically and are three opportunities we articulated.
To you our investors at our Investor day, we're investing heavier in enterprise cloud investing heavier in our cloud migration and investing more in our Rockies them better products and all three are super happy with the returns we've been getting.
Migrations, we're continuing at the pace that we thought we were.
Equally in this time of consolidation and people looking to get off high priced legacy vendors, we say no.
And in enterprise cloud you've seen some of the numbers now half a million dollars a 1 million dollar deals in our shareholder letter, Mike We're seeing great uptake in our enterprise segment as well so all three of those have done really well.
You as investors.
We asked them what is the size of that investment look like how many you'll be doing that or and in our investor day. Later this year and we just came out today.
Sure.
Expect the FY 'twenty for margin profile to be sort of a lowest point.
Margin and we expect them to climb over the coming years back to towards that historical norms.
Joe did you want to add any more color to that.
Yes, Thanks, Scott Brent I was just going to walk you through some of the mechanics. So.
By 'twenty four we do expect operating margins of approximately 18, 5% as Scott mentioned.
That's lower than this year and it's driven by the strategic high priority areas, we're investing in Scott and Mike have both highlighted including new areas of innovation like AI keep in mind in FY 'twenty four will also be lapping the ASU benefit of restructuring savings and lower bonus expense that we had in FY2023.
In terms of FY 'twenty five what's happening there is we do expect continued healthy revenue growth in FY 'twenty five combined with our expectation of improving operating leverage as operating expense growth moderates as Scott mentioned, particularly in the big areas of investment like cloud migration and we will continue to drive general efficiency improvements with scale. So that's some of the mechanics underneath the <unk>.
Sophie that Scott articulated.
Your next question comes from Ari to Johnny and some Cleveland Research. Please go ahead.
Thank you for that.
Question and congrats on the results Cameron I know you.
But even at the end of the year, but congrats on a great run I guess a question for you a lot of strength here in the quarter on.
Enterprise side.
If you do the Doubleclick, what do you think changed from a go to market perspective.
Investments into enterprise advocates in the partner side that helped drive some of these larger deals.
Do you feel like Atlassian.
At a steady state now in terms of the investments on a go to market side or is there more to come here.
You think about the future. Thank you.
Yes.
And thank you for the question and yes, we're very happy with the results we had in Q4 and the strength, we continue to see and migrations in enterprise.
But like I said, none of this happened overnight and none of this was specifically just because of the go to market teams focused more on enterprise. That's really has been a multiyear investment from atlassian largely with the commitment to get closer to our largest customers and deliver honestly to become the strategic <unk>.
<unk> is that they want us to be.
This starts with R&D and you'll see us deliver massive investments in scale, we have 50000 users and our cloud products today certifications extensibility and largely just understanding our enterprise customers' unique needs much more closely and then of course, we matched that investment in go to market by including our enterprise.
Advocates our technical account managers, our customer success managers and so on.
And as we got closer we've been able to get larger deals longer term commitments and becoming a strategic partners that customers want.
However, we've been able to do this all through evolution as we said not revolution and you see that today in our sales and marketing spend so we've been able to actually get close to our largest customers to do these larger enterprise transactions, all while maintaining largely industry, leading sales and marketing expense something that I'm exceedingly proud of.
And something that I'm very happy with my team will continue to do going forward is have that great balance of understanding our flywheel and product led growth in all of those great principles that Mike largely laid out earlier, but how are you thinking about AI, but then of course, when we're ready to go to our largest customers and bring those solutions to them and of course.
Good value in return for that so we.
We will continue to get closer to our largest customers, but we will absolutely continue to maintain our incredible.
Efficient go to market structure going forward.
Your next question comes from Michael <unk> from Keybanc capital markets. Please go ahead, great. Thank you Hey, guys. Good evening. So you said a couple of places that migrations were stronger.
You talked about both of them to data centers as well as to cloud I was wondering if you could drill down specifically on the on the migration to cloud is Matt mentioned things like data residency that were obstacles that were being removed but.
Are we in a position where whether its because macro feels better and people are okay on tcl or some other reason.
The actual migrations from on.
On Prem data center server to cloud or improving at this point is that sustainable.
This is cameron here, so the migration plan.
Multiyear program, we put in place and as the customers choosing college using data center has been very much in line with what we expected as we eliminate cloud blockers, whether that's data residency scale extensibility and gosh, we have a public road map, where we show all of our customers Here's all the things that we are shipping down the road.
So they can make the appropriate choices going forward. It's a combination of all of those things that have allowed us to get.
These large customers choosing to move to cloud.
Of course, as we've said there are still plenty of customers out there that aren't ready for cloud would prefer to stay on premises.
And are choosing data center, and we will continue to see I think a.
Large portion of customers going over the next year choosing datacenter as that option, but that's.
Not a dead end, we largely see that investment in data center as a further commitment into atlassian and we've proven again and again that we can move datacenter customers to the cloud with half of our migrated seats coming from data center customers. So it's once again, we provided the optionality for the customers throughout if they choose data center, that's great. We'll continue to work with them.
Moving into cloud and getting the most value from Atlassian long term.
Mike you're getting that.
Nothing Kevin Thank you know that.
Just re emphasizing that the heartland migrated states coming from data center is.
Is it really important milestone for us as we continue this this long term journey.
Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the question.
Maybe.
Just first if we look at the cloud revenue.
Growth number and we look at we try to decompose net new IRR.
Into net new versus migration versus expense and you talked a little bit about the migration dynamic, but how much like if we look at the if we'd just ask you like a cloud and R. R.
Metric and how much is coming from expansion.
The great to understand that particularly as we're getting into the later innings of the migration and then maybe just as a follow up Bill you talked about healthy top line growth for fiscal 'twenty. Five you gave the 25% to 30% growth range for 'twenty, four which were really appreciate by the way.
Is that a durable growth rate its obviously a wider range given the macro uncertainty, but as that growth rate likely to stay durable, particularly as <unk>.
Maybe the migration tailwind start to add a little bit.
As we get past the server end of life.
Yes. Thanks for the question, Alex I would say starting with your last question in terms of FY 'twenty five we're obviously not giving any guidance on that to your broader question I do believe it's durable.
The value that we're adding to the products that cloud brings that's very specific the value. It delivers to customers I think there's a lot of opportunity for tailwind in that business and so directionally speaking, we should continue to see very healthy growth as I mentioned for FY 'twenty five that will be driven primarily by cloud as the server.
The new base goes away and increasingly datacenter customers migrate to the cloud.
In terms of your first question on net retention rates.
Just say paid seat expansion in free to paid conversions continued to be impacted by the macroeconomic headwinds that we've seen that would impact that area of the business in.
In terms of a specific expansion rate as you know, we don't share quarterly retention and expansion rates.
Having said that we've talked about the macroeconomic pressures.
And the underlying fundamentals in our business outside of that remained very strong however, and we see no change to our structural competitive position. So we do expect those retention rates to improve once the macro picture stabilizes and begins to improve and then as you talked about earlier I'd also highlight other aspects of key aspects of our business like migrations and cross sell and upsell and monthly active use.
<unk> those all remain very healthy and speak to the highly valuable and mission critical nature of our product and those will also feed future expansion rate improvements. So our outlook is very positive on that going forward.
Your next question comes from Fred <unk> from Macquarie. Please go ahead.
Alright, Thank you very much the question.
Firstly actually another thank you for introducing a dark theme as well.
For people like me greatly appreciated, especially when I'm on with some of my colleagues in Australia late at night.
<unk> right now is really focusing on the migration tooling that you have as youre looking at and kind of reviewing the learnings that you have and the investments you've made into your migration tooling. Just how confident are you that at this point you have the server to either data center or a cloud migration tooling on ramp capabilities really solved.
Versus are there any significant risks you still see for some of those larger enterprise customers post server end of light.
Do you need to wait a little longer to have either like additional tools built out. Thank you.
Hi, Fred I can I can take that it's much.
And thanks for the kudos on.
Dr Clayman zero.
That's a good example.
The amazing R&D team, we have it's done appropriately with design tokens and all sorts of things across our.
Cloud platform using.
Atlas Kipp.
It will be coming to other products shortly.
Already in a handful of products that you'll say well across this.
Area with a huge focus on accessibility, which just gets us into migrations.
Dr. Zane, it's quite challenging to do in an accessible way the books.
All of the standards required for full takeaway to have access.
Accessibility issues when it comes to software.
Gets to some of the migrate.
Migration tooling questions that you've asked.
Our migration tooling continues to improve quarter on quarter.
Work really hard on the tools to make that as self service as possible.
And largely what we are doing is continue to work on.
The scale and speed of the tools to move huge amounts of data faster and faster.
The repeat ability of those tools customers don't do one shop migrations, especially the larger ones.
They will migrate their data across test that migrated again.
That multiple times, so the tolling becomes incredibly important to.
To be repeatable and reliable.
And lastly, we work with customers, who have lots of edge cases, some of them have 10 to 20 years of.
<unk> family or consequence data on Prem.
I have edited their own database. They may have done a whole lot of things that we have to take those edge cases to move them across.
We continue to work on how to do that as we get bigger and bigger customers and we can count to more and more edge cases more of the tooling is self service and repeatable.
And lastly, we are continuing to work with.
App vendors and our amazing marketplace community to make sure that their app.
Data and the apps themselves can be migrated as they move from on premise extensibility and plug in systems to connect and forge in the cloud that's quite a unique migration challenge I would say every quarter, we get better and better at doing this we can raise less human powered to do migrations, we can do bigger migrations.
And.
Really proud of how the team is.
Going on managing holds that tooling, so continuing to improve.
I don't know its your question was around is it solved it will get better every single quarter as it has done for the last three years and we'll continue to do that as we migrate more and more server and data center customers those tasks.
Your next question comes from Peter Wade from Alliance Bernstein. Please go ahead.
Thank you.
And great to see it service management growth called out in the note. It was top of mind for US too we see it as a really large opportunity for you going forward. Obviously it already has a large business.
Really impressive to see the 45000 customers in the 80% year over year growth.
Kind of looking forward, how should we think about the total upside from here like what are the profile of the companies that are the largest opportunity going forward that will drive more growth and how much additional headroom do you see in this over the coming kind of three ish years.
Thanks, Peter Scott here.
<unk>.
Look I think there's a huge opportunity.
Durable growth.
Along the period of time, we operate in three very large markets.
So taking them one by one.
You talked about your service management and Ics and the.
The opportunity to areas, where are the challenger in that particular market.
There's plenty of large incumbents, there and plenty of unhappy customers.
I'm sorry.
This massive opportunities for us to take market share in that particular space.
In our.
Mike <unk>.
Lastly, let me talk about what management role, there's just a huge opportunity.
A very large market and if you look at the stronghold, we had around developers and around the development teams and when I hope to see.
These days around the wells like the biggest.
One of the biggest thing issues, how do they make their development teams productive how does that get more out of the development phase and when we look at customers consolidating around what management for all items, there that can throw that other vendors, but icon.
Get rid of all the power of their engineer.
And so we have a huge opportunity for consolidation in our wealth management for oil market.
And then if I look at the innovation the way to our traditional.
Agile and give us market.
A large player there, but there is just fine.
Our customer problems that we can be solving for them and you saw us launch a gyro product discovery target.
Uh huh.
Product managers.
We start talking more and more of a sinus cost. There is just so much customer value that we can.
Can produce and so I'd say a huge opportunities in every market.
At the moment.
So I don't really see any any limit their migrations of our customers.
Two.
The cloud is just a stepping stone for us to be able to keep delivering.
Huge value.
Great cloud revenue.
Yes.
Okay, maybe I'll follow up just speaking with customers as well.
The ICU surface finish as we mentioned the 80% growth in our largest enterprise customers with <unk> service management last year, which shows that hey, we've struck a vein here with the customers where you look at the trends in the market customers are trying to consolidate vendors and save money Jarrod service management for existing Atlassian customers is a great opportunity.
Customers also want their development teams and it teams to come closer together to work on a common platform Euro service management provides that absolute capability and customers want more flexibility quicker time to value of their investments. They don't want to spend six months to 12 months rolling out these tools they want to be able to.
Or just software and get it running and start delivering value to their end users and days weeks at most NGO service management once again deliver solid here. So in the it service management market broadly I think we have a very unique offering with a very unique value prop at a very unique price point in all three of those reasons are the reasons why customers continue.
To look to us and invest in <unk> risk management.
Okay.
Your next question comes from Derrick Wood from Cowen. Please go ahead.
Oh, great. Thanks.
Yes, Joe This is for you I wanted to ask about.
Some of the expansion headwinds being felt upmarket I think with your smaller customers I know a lot are on monthly contracts so perhaps net.
Net expansion rates normalize quicker, but within your enterprise customers you often have multi year contracts customers would historically by seats for growth to take advantage of pricing.
And we've heard from other seat based models that as growth in the Tech World has slowed expansion John renewals can be a lot more challenging. So just curious is that something youre seeing and do you think we still need some time.
The quarters ahead to fully cycled through this with kind of longer enterprise contracts.
Yes. Thanks for the question, let me just talk a little bit about the differences between SMB and enterprise and I think it will get to your question.
The SMB segment of our business is the most sensitive to macro and it has been the most impacted over the last year by the macroeconomic headwinds. We also do see the impact of changes in SMB and our cloud revenue sooner than in an enterprise simply given the mix of monthly cloud billings that we have an SME SMB.
I do expect SMB to be an area that will most benefit in our portfolio of macro improves and we will see that impact in a fairly timely way and our revenue and P&L when it occurs.
Now as you point out enterprise has slightly different dynamics, it's been less macro sensitive over the last year still impacted by macro but not to the same degree as SMB.
And as you pointed out enterprise also benefits from the investments we've made to unblock cloud migrations and improve enterprise capabilities, including premium enterprise SKU value.
And they purchased that value through a hypersphere percentage of annual and multi year contract billings and that reduces the quarter to quarter revenue variability to some degree. So you will see that play out over time and it does take longer for us to see that goodness from enterprise fully reflected in the P&L as a result of that.
Your next question comes from Austin call from Citizen JMP Securities. Please go ahead.
Yes, Thanks for taking my question Congrats on the results. So just.
Cash now exceeds $2 billion on the balance sheet kind of a milestone there I was wondering if you guys could share anything on how you guys are thinking about M&A strategy at this stage.
Yes, thanks for the question.
I'll talk a little bit of just in general about our capital allocation philosophy, which really hasnt changed.
The first priority is investment to drive the long term growth of our business.
Both from an organic R&D and sales and marketing perspective, as well as <unk> as you pointed out mergers and acquisitions and strategic investments and from there. We typically look to Opportunistically return capital to shareholders. As we're currently doing through the share repurchase plan. So.
<unk> has always done M&A as part of its growth strategy and that continues to be part of it going forward as well Scott.
This is I don't think there's any change to our philosophy.
Irrespective of what our balance sheet numbers look like we've always been a company that.
About the long term in terms of our investments and.
Yeah.
Uh huh.
Okay.
It's not going to change as a result of having.
Or a small cash balance out there we will get there.
Right.
Yes.
It looks like from a.
New customer.
Some perspective.
You got to take all you have to say, we're willing to sit around and wait for something that really fits us and really provides value to our customers and so.
For us we're always going to look at the great value of assets and we will do them. When the time is right not irrespective of that bank balance.
Your next question comes from Frank <unk> from Macquarie. Please go ahead.
Hi, I'm back thank you.
Wanted to also ask on the <unk> side of the business as well It service management just the enterprise growth in particular, I think you noted about 80% year over year is looking quite impressive just was hoping to better understand.
Can you describe kind of how much of those.
<unk> service desk customers, who would qualify as enterprises at this point in time, and then secondly, what's really started to work there to be able to turn on that enterprise growth within service management.
Cameron here I'll call it.
So what's driving the enterprise success and it service management.
Largely comes off the back of many of our enterprise investments broadly at the Atlassian cloud platform level, whether that was data residency certifications. All the same benefits that we had for driving migrations in large enterprise automatically get translated to Jarrod surface management. However, the gyro surface management team has also been exceedingly focused on.
Knocking down the specific requirements of those larger customers and you see that largely shelf the validation of that as we are in the leadership quadrant in regard to the Gartner Magic quadrant, which basically shows that hey, we check all the boxes that those customers require while maintaining that unique value of bringing devin it closer together.
<unk> got a relatively competitive price point.
So it's really the investment across the board and it service management as we said a few years ago now we're going to double down in this area and as we paid off those R&D investments and focused our go to market efforts as we reach out to our larger customers.
And we're talking to them about migrating the cloud we're not just talking about getting what they already have over to the cloud we talk about expanding the overall lastly, and value prop as they move to the Atlassian cloud platform.
That's also helped us expand the gyro surface management offerings.
Hey.
Yes, I just wanted to add on one thing I was talking to an enterprise customer, maybe a month month and a half ago.
And one of the things that was coming through to them was the value of the Atlassian platform and one of the reasons why they opted for Jason.
In particular in this case they used atlassian in there.
And that helps with your software and other products the.
The combination of developers.
Development teams and <unk> changes increasingly important we have an incredibly unique value advantage. There is every customer every company becomes a software company that connectivity between development teams and it teams is incredibly important that is powered by our investments in the atlassian platform over time.
That comes through and Atlassian intelligence, and a whole host of otherwise, but it's really gratifying to us to see that resonating with customers, especially the large customers and I'd say its a big differentiator.
The same actually applies on the connectivity between <unk> and service teams in an organization and the wealth management space. So on the other side of a market combinations.
As enterprise service management continues to rollout.
Our virtual agent technologies, using Atlassian intelligence, I think will be a huge boon to larger enterprises in trying to take service management more broadly from <unk> into HR finance marketing and other capabilities. This all relies on the power of the Atlassian cloud platform. It will continue to drive migrations are our largest customer there.
And I think be a differentiator in the <unk>.
Thank you that's all the questions. We have time for today I will now turn the call over to Scott for closing remarks.
Thank you to everyone for joining our call today.
As always we appreciate your thoughtful questions.
Support and a special thank you to the last thing.
<unk> resilience and closing the year with strong momentum.
Thank you Cameron dose on his last earnings call I was going to say a huge thank you for your revenues you've given so I assume so far.
Thank you all and I'll see you next quarter.
Okay.