Q2 2024 Atlassian Corp PLC Earnings Call

Operator: Good afternoon, and thank you for joining Atlassian's earnings conference call for the second quarter of fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations, www.globalonenessproject.org. Welcome to Atlassian's second quarter of fiscal year 2024 earnings call. Thank you for joining us today. Joining me on the call today are Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannonbrook, and Chief Financial Officer, Joe Goodwin. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2024. The shareholder letter is available on Atlassian's Work Life blog and the Investor Relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet.

Good afternoon, and thank you for joining <unk> earnings conference call for the second quarter of fiscal year 2024.

As a reminder, this conference call is being recorded and will be available for replay.

Mr Relations section of Atlassian website. Following this call.

I'll now hand, the call over to Martin Lam Atlassian head of Investor Relations.

Okay.

Martin Lam: Welcome to <unk> second quarter of fiscal year 2024 earnings call. Thank you for joining us today.

Martin Lam: Joining me on the call today, we have that locked in co founders and co Ceos, Scott Farquhar and Mike Cannon Brookes.

Martin Lam: Financial Officer, Joe <unk>.

Martin Lam: Earlier today, we published the shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2024.

Martin Lam: The shareholder letter is available on that lock ins work life block and the Investor Relations section of our website, where you will also find other earnings related materials, including the earnings press release and supplemental investor data sheet.

Martin Lam: As always, our shareholder letter contains management's insights and commentary for the quarter. But during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. If any such risks or uncertainties materialize, or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make.

Martin Lam: As always our shareholder letter contained management insights and commentary for the quarter, but during the call today with a brief opening remarks, and then focus our time on Q&A.

Martin Lam: 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 have you.

Martin Lam: You should not rely upon forward-looking statements as predictions of future events. Such statements represent our management's beliefs and assumptions only as of the date such statements are made. We undertake no obligation to update or revise such statements should they change or cease to be current.

You should not rely upon forward looking statements as predictions of future events forward looking statements represent our management's beliefs and assumptions only as of the date such statements are made and we undertake no obligation to update or revise such statements should they change or cease to be current.

Martin Lam: Further information on these and other factors that could affect our business performance and financial results is included in the filings we make with the Securities and Exchange Commission from time to time, including the section titled risk factors in our most recently filed annual and quarterly reports. During today's call, we will also include non-GAAP financial measures. These non-GAAP financial measures are in addition to, and are not a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.

Martin Lam: Further information on these and other factors that could affect our business performance and financial results is included in filings, we make with the Securities and Exchange Commission.

Martin Lam: Time to time, including the section titled Risk factors in our most recently filed annual and quarterly reports.

Martin Lam: During today's call. We will also include 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.

Martin Lam: The reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release, and investor data sheet in the investor relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. However, out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Scott for opening remarks. Thank you for joining us today.

Martin Lam: A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter earnings release, and Investor data sheet on the Investor Relations section of our website.

Speaker Change: Wed like to allow as many of you to participate in Q&A as possible.

Speaker Change: Out of respect for others on the call we'll take one question at a time.

Speaker Change: With that I'll turn the call over to Scott for opening remarks.

Scott Farquhar: Thank you for joining us today.

Scott Farquhar: As you've already read in our shareholder letter, Q2 was a significant milestone for Alaska. When we first went public eight years ago, we had just over $100 million in quarterly revenue, supported by $54,000. Fast forward to today, and we've just posted our first $1 billion revenue quarter through software across $1 billion in cloud ARR, and we've surpassed 300,000. These accomplishments are a true testament to our amazing team, our diverse and passionate customer base, and the high-value, mission-critical products we deliver. Mike and I are extremely proud and thankful for every single Atlassian who's helped to get it. In Q2, our R&D engine continued to deliver incredible innovation across our cloud. We rolled out Compass.

Scott Farquhar: As you've already read in our shareholder letter Q2 with full of significant milestones for Atlassian.

Scott Farquhar: When we first went public eight years ago, we had just over $100 million quarterly revenue and supported 54000 customers.

Scott Farquhar: Fast forward to today and we've just posted our first $1 billion revenue $1 billion revenue quarter here.

Scott Farquhar: Software crossed $1 billion in cloud IRR, and we said.

Scott Farquhar: 300000 documents.

Scott Farquhar: These accomplishments are a true testament to our amazing team.

Scott Farquhar: And passionate customer base and the high value mission critical products, we deliver.

Scott Farquhar: Mark and I are extremely proud and thankful for every single last pieces help to get a seat.

Scott Farquhar: In Q2, our R&D engine continues to deliver incredible innovation across our cloud platform.

Scott Farquhar: We wrote off campus.

Scott Farquhar: Virtual Aging Capabilities in Jurisdiction, and a first wave of Alaskan intelligence capabilities into general availability. We also welcome Bloom to the Atlassian family, and have been thrilled to see the team deliver on their ambitious AI vision with many new features, including an enhanced editing experience that makes updating a video as easy as editing a text file.

Scott Farquhar: Virtual agent capabilities and service management.

Scott Farquhar: And our first why is the lack of intelligence capabilities into general availability.

Scott Farquhar: We also welcome to lean into the Atlassian family and have been thrilled to see the team deliver on their ambitious ion vision with many new features including enhanced editing experience that makes updating video as easy as editing a text document.

Scott Farquhar: Customers see the value we're delivering in the cloud and are turning to us for strategic guidance on how we can unleash the potential of their teams. We're excited about the momentum we're seeing across the business and remain laser focused on executing against our key strategic priorities, such as Cloud Migrate, Students in the Enterprise, IPFM, and now AI.

Scott Farquhar: Customer can evaluate delivering into cloud and attending to our fifth strategic guidance on how we can unleash the potential that they obtain.

Scott Farquhar: We're excited about momentum we are seeing across the business and remain laser focused on executing against our key strategic priorities.

Scott Farquhar: Cloud migration doesn't.

Scott Farquhar: The enterprise <unk>.

Scott Farquhar: DSM.

Scott Farquhar: And now AI.

Scott Farquhar: And we're in a great position to get after them with massive market opportunities, strong customer commitment to the IT platform, a unique ability to combine over 20 years of insights with the immense power of AI, and most importantly, world class. With that, I'll pop 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 number on your screen. If you'd like to withdraw from the queue, please press the star followed by the

Scott Farquhar: And we're in a great position to get after them with massive market opportunities strong customer commitments in the Austin platform and unique ability to combine over 20 years of insights with the manpower NII.

Scott Farquhar: And most importantly, our world class team.

Speaker Change: With that I'll pop the coal to the operator for Q&A.

Speaker Change: We will now begin the question and answer session.

Speaker Change: Do you have a question. Please press star followed by the one on your fine.

Speaker Change: If you'd like to withdraw from the queue. Please press star followed by the team.

Operator: Your first question comes from Keith Weiss from Morganstown. Please go ahead. Excellent. Thank you guys for taking the question and congratulations on a lot of milestones this quarter and what looks like a solid quarter. In the shareholder letter, you talked about even absent looms, still expecting an acceleration in the cloud business into the second half. It sounds like you saw some signs of stabilization in the quarter, but I was hoping you could drill in a little bit further on what gives you guys the confidence to look for that, to expect that acceleration into the back half of the year and what still seems to be an uneven macro environment. Yeah, thanks, Keith. This is Joe.

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

Keith Eric Weiss: Excellent. Thank you guys for taking the question and congratulations on a lot of milestones this quarter and in what looks like a solid quarter.

Keith Eric Weiss: In the shareholder letter you talked about even absent looms still expecting an acceleration in the cloud business into the second half. It sounds like you saw some signs of stabilization in the quarter, but I was hoping you could drill in a little bit further on what gives you guys. The confidence to look for that to expect that acceleration into the back half of the year and what's still seems to be.

Keith Eric Weiss: Uneven macro environment. Thank you.

Keith Eric Weiss: Yes. Thanks, Keith This is Joe let me start with the cloud revenue results in Q2. They were up 27, 5% loom contributed about a point of growth. So our results ex loom landed in the middle of our guidance range for the quarter.

Joe Goodwin: Let me start with the cloud revenue results in Q2. They were up 27.5%, and Loom contributed about a point of growth. So our results x Loom landed in the middle of our guidance range for the quarter. There were a few cross currents in that performance.

Joe: There were a few cross currents in that performance. So let me walk through them in terms of consumer customer segment and growth driver of trends to try and help and then I'll transition into your question on the confidence around <unk> from a customer segment perspective, we had very strong sales execution in the quarter, which drove healthy performance in our enterprise customer segment. This result.

Joe Goodwin: So let me walk you through them in terms of customer segment and growth driver trends to try and help. And then I'll transition into your question on confidence around H2. From a customer segment perspective, we had very strong sales execution in the quarter, which drove healthy performance in our enterprise customer segment. This resulted in better than expected billings on annual and large multi-year deals, a significant portion of which landed on the balance sheet as unearned revenue. This also drove healthy upsells to premium versions of our products. However, results, conversely, in SMB were slightly lower than we expected.

Joe: Good and better than expected billings on an annual and large multiyear deals a significant.

Joe: <unk> portion of which landed on the balance sheet and unearned revenue. This also drove healthy up sell to premium versions of our products results.

Joe: Our results Conversely in SMB, we're slightly lower than we expected and that was driven by paid seat expansion and a mix shift from monthly to annual subscriptions, which as you know signals stronger customers commitment, but also carriers lower pricing and as you know dynamics in the SMB business, good or bad are largely realized in the quarter given the linearity in that part of the business.

Joe Goodwin: And that was driven by paid seed expansion and a mixed shift from monthly to annual subscriptions, which, you know, as you know, signals stronger customer commitment but also carriers lower prices. And as you know, dynamics in the SMB business, good or bad, are largely realized in the quarter, given the linearity in that part of the business. In terms of the trends on our key growth drivers in the quarter, migrations from server and data center exceeded our expectations, and that's driven by the significant investment and execution focus we put there. In terms of paid seed expansion, while the overall rate of paid seed expansion remained lower than the prior year, the pace of deceleration or slope of that trend continued to moderate from Q1.

Joe: In terms of the trends on our key growth drivers in the quarter migrations from server and datacenter exceeded our expectations and that's driven by the significant investment and execution focus we put there.

Joe: In terms of paid seat expansion, while the overall rate of paid seat expansion remained lower than the prior year, the pace of deceleration or slope of that trend continued to moderate from Q1 and within that trend as mentioned earlier enterprise was better than expected in SMB was slightly worse. We also saw the rate at which consumers customers convert from free to paid at the top of our funnel stabilize.

Joe Goodwin: And within that trend, as mentioned earlier, enterprise was better than expected, and SMB was slightly worse. We also saw the rate at which customers convert from free to paid at the top of our funnel stabilize relative to Q1. And that's another positive leading indicator. And then, finally, other cloud growth drivers like cross-sell and customer retention, churn, and monthly active usage continued to be very healthy and performed in line with our expectations. And beyond that, we didn't really see anything noteworthy in terms of linearity across products, regions, or verticals.

Joe: Relative to Q1, and that's another positive leading indicator and then finally other cloud growth drivers like cross sell and customer retention churn in monthly active usage continues to be very healthy and performed in line with our expectations and beyond that we didn't really see anything noteworthy in terms of linearity in the quarter or across products regions or verticals that were largely in line with her.

Joe Goodwin: They were largely in line with our expectations. In terms of the confidence around the H2 guide, you know, the midpoint of our H2 cloud guidance range, XBloom, does assume slightly accelerating growth rates. The factors that give me confidence are the recognition of those strong Q2 billings on annual and large multi-year agreements rolling off the balance sheet, the increasing momentum on cloud migrations as we focus on unblocking more customers for moving to the cloud and continuing to bring new innovation and value to our cloud offering, the benefit of price increases that are laddering into the model, and the momentum we're seeing in enterprise driving healthy upsell to premium and enterprise versions of our products. I And I also mentioned the leading indicator around free to pay conversions at the top of the funnel. So those are the types of things that give me confidence in, you know, the ability to deliver accelerating cloud revenue growth in the second half of the year. And I hope that that helps. Thank you, everyone.

Joe: Our expectations.

Joe: In terms of the confidence around the H to guide the midpoint of our edge to cloud guidance range X Loon does assume slightly accelerating growth rates.

Joe: Does that give me confidence or the recognition of the strong Q2 billings on annual and large multiyear agreements rolling off the balance sheet.

Joe: The increasing momentum on cloud migrations as we focus on unlocking more customers, who are moving to the cloud and continuing to bring new innovation and value to our cloud offering the benefit of price increases that our lateral into the model and the momentum we're seeing in enterprise driving healthy up sell to premium and enterprise versions of our products I talked about the slope of the trend line on paid seat expansion rates.

Joe: That continues to moderate quarter over quarter and I also mentioned, the leading indicator around free to pay conversions at the top of the funnel.

So those are the types of things that give me confidence in the ability to deliver accelerating cloud revenue growth in the second half of the year and I hope that helps.

Operator: Thank you. Thank you. Your next question comes from Michael Turin from Wells Fargo. Please go ahead.

Joe: Your next question comes from Michael <unk> from Wells Fargo. Please go ahead.

Operator: Thanks, appreciate you taking the question. For Scott or Mike, there's been plenty of buildup, and probably too much focus from us on the server end of life. For investors asking us what's next, the letter does a good job of framing some of that out. But maybe you can share your vision around what the cloud migration opens up for Atlassian from here. And then Joe, just as a follow-on from the 10 points of migration tailwind, that cloud line: How should we think about that post-server end-of-life? Will that at all lessen, or does it simply shift more towards the data center? Any puts and takes you have there for us to consider are useful. Thank you.

Michael: Okay. Thanks, I appreciate you taking the question for Scott or Mike, there's been plenty of buildup in probably too much focus from us on the server end of life.

Michael: For investors asking us what's next the letter does a good job in framing some of that out but maybe you can share your vision.

Speaker Change: Around what the cloud migration opens up for Atlassian from here and then Joe just as a follow on on the 10 points of migration tailwind that cloud line has been.

Speaker Change: How should we think about that post server end of life for that at all lessen or does it simply shift more towards data center.

Speaker Change: Any puts and takes there for us to consider a useful thank you all.

Scott Farquhar: Michael, thanks for the question; Scott here. Firstly, for those new to the Lightning Story, just a reminder, we said historically that about 10 points of our cloud growth has come from migration. And for those of you who really knew the last-in story, this coming quarter, in the next few weeks, we will have our end of support, which has been a three-plus-year journey with our customers. And so the three points I want to make in answer to your question, Michael, firstly is that migrations will continue for multiple years.

Speaker Change: Michael Thanks for the questions go ahead.

Speaker Change: Firstly can you <unk>, sorry, just to remind we.

Speaker Change: <unk> said historically that about 10 points of that cloud growth has come from migrations and you're really using zoom story.

Speaker Change: This coming quarter in the next few weeks, we will have our endless support will be happening, which has been a three plus year journey with our customers and.

So the three points I want to make.

Speaker Change: The answer to your question Michael.

Firstly is that migration will continue for multiple years, and we said historically that about half and migrations to the cloud come from that data center customers are.

Scott Farquhar: And we said historically that about half our migrations due to crowds come from our data center customers. In this last quarter, even with a lot of server customers migrating with the end of support, 60% of our migrations in the last quarter came from data centers. And so with that, we expect to see migrations continue for a long time to come. And we've also, you know, made huge R&D investments in order to, you know, keep our customers. Cloud. And you continue to stay up.

Speaker Change: In this last quarter, even with a wider set of customers migrating by the end of support 60% of our migrations in the last quarter came from data center customers and so we've got when you expect to see migration continue for a long time to come and we are also not a huge R&D investments in order to keep me out.

Speaker Change: Our customers moving to the cloud and to stay up.

Scott Farquhar: Doing that, we've launched a data residency in Canada this last quarter. We also brought your own keys to your software. We continue to remove blockers for our cloud customers, and that continues to open up the aperture of migration. The second point I'd like to make is that the cloud continues to be the gateway to full, lasting experiences. And customers, once they get to the cloud, are really getting the best we can offer, and you see us continue to deliver innovation in the cloud. So whether that's Compass, which has continued to grow, GeoPro Discovery, which has continued to grow in the cloud, Talked about passing 4,000 paying customers, also Woom, the interactive system, and all the AI functionalities that we have already developed and continue to develop are only available in the cloud.

Speaker Change: That we have.

Speaker Change: <unk> data residency in Canada this last quarter.

Speaker Change: Also do you bring <unk> software, we continue to remove bosses for our cloud customers and that continues to open up the aperture of migration.

Speaker Change: The second point I'd like to make is that cloud continues to be the gateway to full autonomy.

Speaker Change: Experience and customers once they get to cloud I'll really getting the best we can offer and you see us continue to deliver innovation in cloud.

Speaker Change: Whether that's a complex which continued.

Speaker Change: Continued to grow <unk> discovery, which we talked about INR 4000 paying customers also wound.

Speaker Change: This is done and all the.

Speaker Change: Functionality that we have already developed and continue to develop our own available in cloud and so with that our customers get a better experience, but we also have an incredible opportunity to sell customers more products and more functionality that really makes a difference for them.

Scott Farquhar: And so with that, our customers get a better experience, but we also have an incredible opportunity to sell customers more products and more functionality that really makes a difference for them. And lastly, enterprise. The first thing is enterprise, which is through these migrations and having these discussions with customers around migrating to the cloud, we've really deepened our relationships with our best customers, whether they're North American financial services customers or German auto manufacturers. These discussions have led to us being seen more and more as a strategic partner for them, and they want to do more with us.

Speaker Change: And lastly.

Speaker Change: Lastly, our enterprise.

Speaker Change: The third thing of enterprise, which is a Thursday.

Speaker Change: Through these migrations and having these discussions with customers around migrating to cloud, we've really strengthened our relationships with our best customers with advanced North American financial services customers or German auto manufacturers based discussion led to us being seen more and more of a strategic partner for them and I wanted to do more.

Joe Goodwin: And you saw that we talked about Mercedes-Benz in our letter, that Mercedes-Benz migrated 30,000 seats from the data center to the cloud and Jira and Confluence. And as part of that, they were so excited by the usage of our ITSM solution in that process that they then adopted that and started using it with their customers. And so we are becoming more and more a strategic partner for these large companies. Joe, do you want to talk about some of the puts and takes? Yeah, thanks, Scott. Michael, it's really too early to give a specific number on the migration impact on cloud revenue growth beyond FY24. I would just echo what Scott said.

Speaker Change: More with US and you saw that we took that <unk> been in al <unk> Mike.

Speaker Change: <unk> at 30000 feet from data center to cloud and <unk> as part of that they were so excited by the usage of our Ikea installation in that process that they then have adopted that and started using it with their customers and so on.

Speaker Change: We are becoming more and more strategic partner for these large enterprises.

Speaker Change: <unk> talked about some of the puts and takes.

Yeah. Thanks, Scott, Michael It's really too early to give a specific number on the migration impact of cloud revenue growth beyond FY 'twenty four.

Speaker Change: Just echo what Scott said, we continue to expect migrations to be a significant driver of cloud revenue growth in FY 'twenty five and beyond that's driven primarily by the significant size of the datacenter installed base. There's a lot of opportunity there because those are some of our very largest customers and for them. It's more a question of when and not if they move to the cloud. So we continue to expect to see.

Operator: We continue to expect migrations to be a significant driver of cloud revenue growth in FY25 and beyond, and that's driven primarily by the significant size of the data center installed base. There's a lot of opportunity there because those are some of our very largest customers. And for them, it's more a question of when and not if they will move to the cloud. So we continue to expect to see migrations be a significant driver of cloud revenue growth beyond FY24. Your next question comes from Gregg Moskowitz from Mizzou Health Securities. Please go ahead.

Speaker Change: Migrations be a significant driver of cloud revenue growth beyond FY 'twenty four.

Speaker Change: Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.

Operator: Okay, thank you very much for taking the question, and maybe I'll focus on the data center business. So it's impressive that that business is still actually growing 30% plus, even after adjusting for the net benefit from migrations, obviously 41% reported. Joe, when we look at that strong growth, how should we think about the relative contributions from install-based expansion versus pricing versus NetNew Logos? Thanks. Yeah, thanks, Gregg. You know, you're right.

Gregg Moskowitz: Okay. Thank you very much for taking the question and maybe I'll focus on the data center business. So it's impressive that that business is still actually growing 30% plus even after adjusting for the net benefit from migrations, obviously at 41% reported Joe when you look at that shrunk growth how should we think about the realm.

Speaker Change: <unk> contributions from install base expansion versus pricing versus net new logos.

Joe: Yes, Thanks, Greg.

Joe Goodwin: It was another strong quarter for data center. It was solidly ahead of our expectations, driven by stronger than expected migrations from server. That's partially offset, as you point out, by the stronger migrations to cloud. I'd say the biggest driver, once you get past the net migration impact, is really seed expansion. And that goes to my point earlier around paid seed expansion performance in enterprise was actually quite strong this quarter.

Joe: It was another strong quarter for data center. It was solidly ahead of our expectations driven by stronger than expected migrations from server.

This was partially offset as you pointed out by the stronger my game operations to cloud.

Greg: I'd say the biggest driver once you get past the migration impact is really seat expansion and that goes to my point earlier around paid seat expansion performance in enterprise was actually quite strong this quarter.

Operator: And so we believe that's a statement about macro, as well as our ability to serve those customers and the big investments that we've made to, you know, improve our enterprise-grade capabilities, address things like scalability, certifications, data residency, and app integration. All these things are very compelling in moving customers to the cloud, but also in terms of, and as a result of that, customers are staying with us, and they're moving to data centers, a stepping stone that will ultimately result in a migration down the road. So it's primarily paid seed expansion from our perspective. Once you get past the migration impact, Your next question comes from Fred Habemeyer from Macquarie. Please go ahead.

Greg: And so we believe thats a statement around macro as well as our ability to serve those customers and the big investments that we've made to improve our enterprise grade capabilities address things like scalability certifications data residency App integration all of these things are very compelling and moving customers to the cloud, but also in terms of.

Greg: And as a result of that customers are staying with us and theyre moving to data centers, a steppingstone that will ultimately result in a migration down the road. So it's primarily paid seat expansion from our perspective.

Greg: Once you get past the migration impacts.

Greg: Your next question comes from Frank <unk> from Macquarie. Please go ahead.

Joe Goodwin: Hi, thank you very much. I wanted to ask, as we start this year, we've once again seen that layoffs in the tech industry have been picking up. Although at a substantially lower scale than what we saw in the prior year. So I wanted to ask, as we look at your outlook for cloud revenue growth, how comfortable do you feel that guidance is once again de-risked for the potential impacts from any sort of layoffs in the tech industry? And secondly, have you seen any signs at all that these layoffs might be impacting anything in your free to pay conversion or anything? Thank you. Yeah, thanks, Fred.

Frank: Hi, Thank you very much.

Frank: I wanted to ask as we start this year, we've once again seen that layoffs in the tech industry had been picking up.

Frank: Although the substantially lower scale than what we saw in the prior year. So wanted to ask as we look at your outlook in the cloud revenue growth.

Frank: How comfortable do you feel that guidance is once again derisked for the potential impacts from any sort of layoffs in the tech industry and secondly have you seen any signs at all that these layoffs may be impacting anything and you're free to paid conversion or anything else today. Thank you.

Speaker Change: Yes, thanks Fred.

Joe Goodwin: You know, we haven't seen a dramatically different impact than we expected coming into the year relative to the recent announcements. Obviously, it's something we keep an eye on and track. You know, if you think about the guidance, we really haven't changed conceptually how we freshen the guidance ranges for the cloud. Just to reiterate, the high end of our cloud guidance range for the year assumes healthy acceleration and H2 growth rates that we talked about with Keith. That's driven by lower macro headwinds and the related impact that would have on improving paid seed expansion.

Speaker Change: Haven't seen.

Speaker Change: Dramatically different impact than we expected coming into coming into the year relative to the recent announcements obviously its something we keep an eye on and track.

Speaker Change: If you think about the guidance.

Speaker Change: Really haven't changed conceptually, how we freshen the guidance ranges for the cloud.

Speaker Change: Just to reiterate the high end of our cloud guidance range for the year assumes healthy acceleration in <unk> growth rates that we talked about with Keith.

Speaker Change: That's driven by less macro headwinds and the related impact that would have on improving paid seat expansion. It also assumes strong migrations from server to cloud following server end of support and continued strength in data center migrations cross sell upsell and customer retention on the low end of the guide that for the year that does assume increasing macro headwinds and the impacts you are.

Joe Goodwin: It also assumes strong migrations from server to cloud following server end of support and continued strength and data center migrations, cross sell, upsell, and customer retention. On the low end of the guide, you know, that for the year, that assumes increasing macro headwinds and the impacts you're talking about and the related impact that would have not only on paid seed expansion but also areas of our business that have held up well to date, such as migrations and cross-sell and upsell. And then lastly, it would assume we do a relatively poor job, we get relatively weak results post server end of support on migrations from server to cloud. So, at the midpoint of our guidance, we're assuming that paid seed expansion rates are kind of steady at where they are today. That drives, you know, slightly accelerated revenue growth. At the high end of the range, we get favorable macroeconomic outcomes that drive, you know, improvement in that and thus better revenue. On the low end, we assume that we see the headwinds, and that impacts those paid seed expansion rates.

Speaker Change: Talking about and the related impact that would have not only on paid seat expansion, but also areas of our business that have held up well to date, such as migrations and cross sell and up sell.

Speaker Change: And then lastly, I would assume we do a relatively we get relatively weak results post server into support on migrations from server to cloud so.

Speaker Change: At the midpoint of our guidance, we're assuming that paid seat expansion rates are kind of steady to where they are today.

That drives slightly accelerated revenue growth at the high end of the range, we get favorable macroeconomic.

Speaker Change: It comes that drive improvement in that and thus better revenue on the low end, we assume that we see the headwinds and that impacts those paid seat expansion rates.

Speaker Change: Just to add on to John Bair.

Speaker Change: F&B.

Pension being a bit wait, but when I look at the enterprise business than we're talking with our biggest customers.

Scott Farquhar: Just to add to Joe there, he talked about S&B pay-to-expansion being a bit weak, but when I look at the enterprise business, and we're talking with our biggest customers, I think there is great excitement amongst them for what we're providing, and that comes in a lot of different ways. You know, it comes in competitive switch-outs; we see a lot of our customers looking to us to replace more I thought that might happen early in the economic cycle, but it's actually showing up pretty strongly now in a lot of the deals that we're doing for replacing other products out there that might be older and or more expensive. We're also seeing that in AI and the excitement around customers who are excited to use our AI features.

Speaker Change: I see great excitement.

Speaker Change: Among them for what we are providing and that comes in a lot of different ways.

Speaker Change: He comes in competitive switch out.

Speaker Change: One of our customers or each of us to replace more expensive.

Speaker Change: There are other products at this particular stage.

Speaker Change: That might have an alien economic cycle, but it's actually showing up pretty strongly now.

Speaker Change: The deals that we're doing of replacing other.

Speaker Change: Product out there that might be older more expensive.

Speaker Change: The thing that NII on the excitement around customers, who are starting to use our II features and then the new products that we are delivering cloud are having great customer reception, but it's still very early days I think that gyro product discovery is a great example, we talked about where we are delivering.

Scott Farquhar: And then the new products that we are delivering in the cloud are getting great customer reception, though still very early days. I think that Jira Product Discovery is a great example we talked about where we're delivering innovation value to these customers in the cloud, and they're picking it up and running with it. So they're all strong areas that I think are sort of counter to anything else in technology. Your next question comes from Kyle Keystead from UBS. Please go ahead.

Innovation value to these customers in cloud and they're taking it up.

Speaker Change: Running with it so they're all strong areas that.

Speaker Change: Think our sort of counter to any nobody else new technologies.

Speaker Change: Okay.

Speaker Change: Your next question comes from Karl Keirstead from UBS. Please go ahead.

Operator: Thank you. I'd like to focus on the remaining server cohort. The sequential decline in server maintenance of 10 million was at least a little bit less than I was modeling. Are you surprised by that stickiness?

Karl Keirstead: Thank you I would like to focus on the.

Karl Keirstead: The remaining server cohort the sequential decline in server maintenance of $10 million was at least a little bit less than I was modeling are you surprised by that stickiness can you offer us any help in sizing the cohort that will likely not migrate at the end of support date and continue.

Joe Goodwin: Can you offer us any help in sizing the cohort that will likely not migrate at the end of the support date and continue to run unsupported versions and perhaps offer a little color as to what that cohort looks like in terms of customer size, vertical, anything? Thank you so much. Yeah, thanks, Carl. This is Joe.

Karl Keirstead: To run unsupported versions, and perhaps offer a little color as to what that cohort looks like in terms of customer size vertical anything. Thank you so much.

Karl Keirstead: Yes. Thanks, Carl This is Joe I'll go first and Scott can chime in if he has anything to add in terms of the server performance that you referenced server delivered much better results than expected results in Q2, and it's certainly been more resilient than we expected over the course of the last year.

Joe Goodwin: I'll go first, and Scott can chime in if he has anything to add. In terms of the server performance that you referenced, it delivered much better results than expected in Q2, and it's certainly been more resilient than we expected over the course of the last year. You know, I'd highlight this, that it's not because of slower migrations to the cloud and data center. Those remain squarely on track, if not ahead of where we expected to be.

Karl Keirstead: Alright.

Scott Farquhar: It's not because of slower migration to cloud and datacenter those remained squarely on track if not ahead of where we expected to be in general what we're seeing is better renewals better customer retention and less than expected churn, which highlights the mission critical nature of our product and customer commitment to atlassian roadmap and platform and of course. It also means mathematically we have a bigger opportunity than.

Joe Goodwin: In general, what we're seeing is better renewals, better customer retention, and less than expected churn, which highlights the mission-critical nature of our product and customer commitment to Atlassian's roadmap and platform. And, of course, it also means mathematically that we have a bigger opportunity than we originally thought in terms of future seat migrations to the cloud, which is a great position to be in. In terms of the end of support moment, we're about two weeks out, and really, there's been no change from what we discussed last quarter, other than that we're seeing those stronger renewals and customer retention. We end support in a couple weeks.

Scott Farquhar: We originally thought in terms of future seat migrations to the cloud, which is a great position to be in in terms of the end of support moment, we're about two weeks out and really theres been no change from what we discussed last quarter other than that we're seeing those stronger renewals and customer retention.

Scott Farquhar: We end of support in a couple of weeks there has been no change to our focus around migrating as many of those server customers as possible the customers that remain on that server installed base of predominantly larger more complex accounts that are typically blocked from the cloud at the moment. So we continue to expect most of those customers that migrate will migrate the data.

Scott Farquhar: There's been no change to our focus around migrating as many of those server customers as possible. The customers that remain on that installed base are predominantly larger, more complex accounts that are typically blocked from the cloud at the moment. So we continue to expect most of those customers that migrate will migrate to data centers, and we continue to hold prudent assumptions to account for customers who will choose not to migrate in FY24, and that's also factored into our guidance. Just to add some color there, I think Joe's talked about the financial aspect of it, obviously, with an end of life moment, it's hard to predict week by week exactly what happens, but we've made a lot of effort looking at every single customer that still exists on a server and what it will take to get them across the cloud in an ideal sense or to the data center if they can't move there.

Scott Farquhar: Center and.

Scott Farquhar: We continue to hold prudent assumptions to account for customers, who will choose not to migrate in FY 'twenty four and that's also factored into our guidance.

Speaker Change: Yes, just to add some color there I think Joe has talked to the financial aspect.

Speaker Change: Obviously with an end of life.

Speaker Change: I meant it.

Speaker Change: To predict.

Speaker Change: Weak basis, exactly what happened, but we put a lot of it in Q, we'll see to every single customer that really do some theater and what it will take to get them across the cloud in an ideal sense or data center.

Speaker Change: Dichotomy there.

Speaker Change: Our friends at <unk>.

The stickiness of that product and kind of a testament to what.

Scott Farquhar: As Joe referenced, it really comes to the stickiness of our products and kind of a testament to what we've built and how valuable we are for our customers that we haven't seen turn. And for many of these customers who can't move to the cloud, a data center is a drop-in replacement that does not require, you know, many months of planning. And so, customers can leave it to the last minute and switch out to the data center. A lot of that happened, you know, as we crossed the end of server support threshold. Your next question comes from Kasthuri Rangan of Goldman Sachs. Please go ahead.

Speaker Change: What we built and how valuable we offer our customers that we haven't seen churn there.

Speaker Change: And so many of these companies you commented you go out a data center is a drop in replacement that does not require many months of planning and sorry.

Speaker Change: Customers can always go off.

Speaker Change: Keith Scott you got a central and I take away a lot of that happen.

Speaker Change: At the end of a sort of a support.

Speaker Change: The ports.

Speaker Change: I saw it in the next few weeks.

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

Kasthuri Gopalan Rangan: Thank you very much congratulations on the results from a timeline standpoint.

Kasthuri Gopalan Rangan: Our cloud migration is a big opportunity clearly, but then when you look at that trend over the last five or six quarters or so the cloud has decelerated from 49 person or so I think it was Q1 last year or two.

Operator: Thank you very much. Congratulations on the results. From a trendline standpoint, the cloud migration is a big opportunity, clearly. But when you look at that trend over the last five to six quarters or so, the cloud has decelerated from 49% or so, I think it was in Q1 last year, to 27%. And a big chunk of that is coming from migration.

Kasthuri Gopalan Rangan: 7% and a big chunk of that is coming from migration. So we look at the net underlying cloud growth or did.

Kasthuri Gopalan Rangan: Decelerate it.

Kasthuri Gopalan Rangan: Server continue.

Kasthuri Gopalan Rangan: Data Center I'm, sorry, it continues to be a champion for.

Kasthuri Gopalan Rangan: 54 sort of 41%.

Speaker Change: Can you help understand what could be costing the dichotomy that.

Speaker Change: Maybe there is a preference for the data center product.

Speaker Change: That case.

What is the long term looked like for the company because companies generally either having a cloud product headwinds our long term debt.

Joe Goodwin: So we look at the net underlying cloud growth; it has decelerated. Our server, data center, I'm sorry, continues to be a champion; it's gone from 54% to 41%. Can you help understand what could be causing the dichotomy that maybe there is a preference for the data center product? If that's the case, then what does the long term look like for the company? Because companies generally either have a cloud product that wins or in the long term that wins. Rarely does both win, but maybe it does for Atlassian. Can you help us understand what you are really betting on? Where do you wish your customers would really go, and how are you gonna make it happen? Thank you. Yeah, Cash, this is Joe.

Speaker Change: Rarely does both win but maybe it does for Atlassian.

Speaker Change: Can you help us understand what are you really betting on it where do you cut with your customers.

Speaker Change: Where do you wish your customers really go and how are you going to make it happen. Thank you so much.

Speaker Change: Yes, Kash this is Joe.

Joe: Customers are not choosing datacenter overcloud, what's happening here is server migrations to data center and cloud both exceeded our expectations and so we don't see more customers choosing one over the other.

Joe: If there was any weakness in our cloud performance versus expectations. That's paid seat expansion has been lower than we expected in this quarter. It was slightly lower than we expected, particularly in SMB.

Joe: D C strength on the other hand as I mentioned earlier was also driven by stronger migrations from server as well as paid seat expansion. So.

Joe Goodwin: You know, customers are not choosing data center over cloud. What's happening here is server migrations to data center and cloud both exceed our expectations. And so we don't see more customers choosing one over the other.

Joe: We feel really good about the fact that customers are looking at data center as a stepping stone to the cloud and ultimately we want to get those customers to the cloud because thats, where our customers receive the best experience the most secure experience.

Joe Goodwin: If there was any weakness in our cloud performance versus expectations, it was that paid seed expansion, you know, has been lower than we expected. And this quarter, it was slightly lower than we expected, particularly in SMB. DC strength, on the other hand, you know, as I mentioned earlier, was also driven by stronger migrations from server as well as paid seed expansion. So, you know, we feel really good about the fact that customers are looking at data centers as a stepping stone to the cloud. And ultimately, we want to get those customers to the cloud because that's where customers receive the best experience, the most secure experience from Atlassian, and it gives us a chance to add more and more value over time, as Scott discussed earlier in the call.

Joe: From Atlassian and it gives us a chance to add more and more value over time as Scott discussed earlier in the call.

Speaker Change: Let me add to that which is every.

Speaker Change: Every customer I talk to whether that be.

Speaker Change: A German bank kind of considered one of the more conservative.

Speaker Change: End of the scale through too.

Speaker Change: Small medium sized businesses out there even in regulated environments. All of them are telling you that cloud is the future and if.

Speaker Change: Five years ago.

Speaker Change: Customer cloud was the future customers are telling me that's the case and in many cases.

Speaker Change: But I need the time to plant a migration has got tens of thousands of users.

Speaker Change: I can not only to migrate to the product we have in cloud that expand your usage of atlassian.

Joe Goodwin: Let me add to that, which is, you know, every customer I've talked to, whether that be, you know, a German bank, which we would consider one of the more conservative end of the scale through to, you know, small, medium-sized businesses out there, even in regulated environments, all of them are telling me the cloud is the future. And, you know, if you went here five years ago, we were telling customers that the cloud was the future. These days, customers are telling me that's the case. And in many cases, it's that they either need the time or they don't need the time.

Speaker Change: Good.

Speaker Change: The.

Speaker Change: Products that we can replace and so we pay a lot of that happening, but that takes a little bit of time at the largest.

Speaker Change: Or in some cases.

Speaker Change: I'll talk to you about Boston.

They are pushing us to say, hey, I need data residency alright certification.

Speaker Change: Allstate brand.

Speaker Change: With Taylor.

Speaker Change: We've got customers.

Speaker Change: Your next.

Speaker Change: Comes from Nick Altmann from Scott to your Bank. Please go ahead.

Nick Altmann: Awesome. Thanks, guys.

Nick Altmann: I wanted to circle back to sort of a stabilization in the free to paid conversion I guess when you think about how in the quarter. You saw that stabilize do you think that was an anomaly just because perhaps is the stronger spending period for software, where you kind of see it stabilizing over the next coming quarters. Thanks.

Scott Farquhar: Plan a migration if you've got tens of thousands of users, you know, that is a chance not only to migrate to, you know, the product we have in the cloud but to expand your usage of a lab. I work at, you know, other companies that we can replace, and so we see a lot of that happening, but that takes a little bit of time at the largest customers, or in some cases, but is decreasing. Our customers are blocked from the cloud, and they're pushing us to say, hey, I need data residency, or I need FedRAMP.

Nick Altmann: Yes.

Speaker Change: Thanks for the question, we do see it as a stabilized.

Speaker Change: The durable stabilizing factor, we think it's super important because it is a leading indicator of success today's land and new customers are tomorrow's expansion opportunity. So we fundamentally believe that a lot of them.

Operator: So we're thinking about a lot of that. Your next question comes from Nick Altman from Scotia Bank. Please go ahead.

A lot of that is macro driven I'd also say we've done a good job of investing to improve the efficiency of our funnel and to improve the efficiency and the hit rate on that free to paid conversion and so hats off to the team inside Atlassian is doing a phenomenal job on driving improvements there. So some of it is macro some of it is absolutely our own execution and over.

Joe Goodwin: Awesome. Thanks, guys. I wanted to circle back to sort of the stabilization and the free-to-paid conversion. I guess when you think about, you know, how in the quarter you saw that stabilize, do you think that was an anomaly just because perhaps it's a stronger spending period for software, or do you kind of see it stabilizing over the next coming quarters? Thanks.

Speaker Change: We feel it's durable moving forward.

Joe Goodwin: Thanks for the question. We do see it as a stabilizing factor, a durable stabilizing factor. We think it's super important because it's a leading indicator of success. Today's land and new customers are tomorrow's expansion opportunities. So, you know, we fundamentally believe that a lot of that is macro driven.

Speaker Change: Your next question comes from Ryan Macwilliams from Barclays. Please go ahead.

Ryan Macwilliams: Thanks for taking the question great to see data centers driving more than 60% of cloud migration at this point.

Ryan Macwilliams: So in the shareholder letter and just been mentioning how you've been unblocking under.

Ryan Macwilliams: The largest customers on data center to help them with the cloud do you have a rough idea of what percentage of medicine. Our revenue you would considered locked today and if unblocked.

Joe Goodwin: I'd also say we've done a good job of investing to improve the efficiency of our funnel and improve the efficiency and the hit rate on that paid free to paid conversion. And so a hat tip to the team inside Atlassian who are doing a phenomenal job of driving improvements there. So some of it is macro, and some of it is absolutely our own execution.

Ryan Macwilliams: Would these customers be willing to move to the cloud after recently moving to data center.

Speaker Change: Yeah, Ryan, we're not going to be able to help I'm sorry go ahead Scott.

Scott Farquhar: Perfect. Thank you guys.

Scott Farquhar: Yes, Brian I was going to say, we're not going to be able to provide a breakdown today on what that blocked percentages keep in mind. Those data center customers are primarily our largest and most complex.

Operator: And overall, we feel it's durable moving forward. Your next question comes from Ryan McWilliams from Barclays. Please go ahead, taking the question courtesy data centers driving more than 60% of the cloud. So in the shareholder letter, and you... How you've been unblocking some of the largest customers on Data Center to help them move to the cloud. Do you have a rough idea of what percentage of Data Center revenue you would consider blocked today? And if unblocked, would these customers be willing to move to the cloud after recently moving to Data Center? Yeah, Ryan, we're not going to be I'm not going to be able to help you. Oh, sorry. Go ahead, Scott. That's okay.

Scott Farquhar: So you can imagine it's all the things, we're investing against and making progress on I mentioned earlier scalability data residency certifications app integration.

A lot of investment a lot of effort going to unblock that that's why we're confident in the ability to continue to grow.

Scott Farquhar: <unk> from data center to cloud and.

Scott Farquhar: So we feel very confident in our ability to continue to drive migration over the next coming years.

Speaker Change: And Ryan just to chime in this market to be able to have Bryan kipp.

Speaker Change: When asked many product questions today.

Speaker Change: I will say its about the long term partnership with our customers I think that's really important even more so for the biggest of the big.

Joe Goodwin: You go. Yeah, Ryan, I was going to say we're not going to be able to provide a breakdown today on what that blocked percentage is. Keep in mind, those data center customers are primarily our largest and most complex. So you can imagine it's all the things we're investing in and making progress on. I mentioned earlier that scalability, data residency, certifications, app integration, you know, a lot of investment, and a lot of effort going to unblock that.

Ryan Macwilliams: One of the things that the customers will tell us if they have been really impressed by our delivery over the last three to five years in the cloud or enterprise capabilities, we have a public cloud roadmap. So we do.

Bulk of that fed ramp deliveries out of residents who delivery compliance delivery across all the different geographies that we operate in.

Ryan Macwilliams: The.

Ryan Macwilliams: Last quarter, we hit a 100% of that roadmap in terms of delivery on time and what that building is this long term strategic partnership long term relationship with those biggest of the big customers. We believe in our enterprise business over the next decade.

Joe Goodwin: That's why we're competent in the ability to continue to grow migrations from data center to cloud. And so we feel very competent in our ability to continue to drive migration over the next coming years. Ryan, just to chime in, this is Mike here.

Ryan Macwilliams: Typically many decades, it's about building that partnership with those biggest customers that we have and that partnership is built on trust. It's built on continued delivery of good things that we said we're going to deliver.

Michael Cannon: I'll give you two a break because I haven't asked many product questions today. But I will say it's about a long-term partnership with our customers. I think that's really important, even more so for the biggest of them. One of the things that customers will tell us is that they've been really impressed by our delivery over the last three to five years in the cloud for enterprise capabilities. We have a public cloud roadmap. So we do talk about FedRAMP delivery, data residency delivery, and compliance delivery across all the different geographies that we operate in. In the last quarter, we hit 100% of that roadmap in terms of delivery on time.

Ryan Macwilliams: And when you talk to those customers as Scott mentioned, they are believing that cloud is the long term future of they understand that they are working on moving and all sorts of different right.

Ryan Macwilliams: Proportion of migrations coming from data center today.

Ryan Macwilliams: But that engineering delivery has been a hallmark of our strength in terms of building that partnership with cognizant, obviously, we intend to continue that over time.

Ryan Macwilliams: Your next question comes from Keith Bachman from Dan.

Michael Cannon: And what that's building is this long-term strategic partnership, a long-term relationship with those biggest of the big customers. We believe in our enterprise business over the next decade, and hopefully many decades. It's about building a partnership with those biggest customers that we have. And that partnership is built on trust.

Keith Frances Bachman: Please go ahead.

Keith Frances Bachman: Yes, many thanks and congratulations on the solid quarter and guide Joe I wanted to direct this for you you've implicitly given us guidance for the June quarter, which is post the <unk>.

Keith Frances Bachman: The exploration of server and I just wanted to get your thoughts to what extent is the June quarter, a reasonable proxy without for FY 'twenty five growth rate. So I'm not asking for 25, but I'm just asking is there anything usual in the implied growth rates for cloud and data center that we should think about.

Michael Cannon: It's built on continued delivery of the things that we say we're going to deliver. And when you talk to those customers, as Scott mentioned, they are believing that the cloud is their long-term future. They understand that.

Operator: They're working on moving at all sorts of different rates. We have a great proportion of our migrations coming from data centers today. But that engineering delivery has been a hallmark of our strength in terms of building that partnership with those customers. And obviously, we intend to continue that. Your next question comes from Keith Bachman from BMO. Please go ahead.

Keith Frances Bachman: As we are considering our 25 estimates in other words is the February deadline going to pull forward a bunch of revenues or is there anything else that we should think about for the June quarter exit run rate. Thank you.

Joe Goodwin: Yes, many thanks and congratulations on the solid quarter and guide Joe, I wanted to direct this for you. You've implicitly given us guidance for the June quarter, which is post the Exploration of Server. And I just wanted to get your thoughts on to what extent the June quarter is a reasonable proxy for FY25 growth rates? So I'm not asking for 25, but I'm just asking, is there anything unusual in the implied growth rates for cloud and data center that we should think about as we're considering our 25 estimates? In other words, is the February deadline going to pull forward a bunch of revenues, or is there anything else that we should think about for that June quarter exit run rate? Thank you. Yeah, thanks.

Speaker Change: Yeah. Thanks, it's really too early to talk specifically about FY 'twenty five in general.

Speaker Change: Talk a little bit about the individual lines.

Speaker Change: If you look at data center, we do expect growth rates. There, we will continue to decelerate.

Speaker Change: Server data center migrations dropped essentially to zero and the data center to cloud migrations accelerate as we continue to deliver on removing cloud blockers.

Speaker Change: In terms of the cloud we've talked a lot on the call about migrations being a multiyear journey, so I won't rehash that in.

Speaker Change: In addition to that keep in mind, we have a number of other growth drivers in that model first of all paid seat expansion within existing customers is the biggest driver and even bigger than the migrations factor that we've talked about and that has been an area of the model. That's been most impacted by macro headwinds over the last year. So a lot of your view on 25 is going to depend on macro.

Joe Goodwin: You know, it's really too early to talk specifically about FY 25. In general, you know, we, I'll talk a little bit about the individual lines. If you look at data centers, we do expect growth rates there to continue to decelerate as server to data center migrations drop essentially to zero, and data center to cloud migrations accelerate as we continue to deliver on removing cloud blockers. In terms of the cloud, we've talked a lot on the call about migrations being a multi-year journey, so I won't rehash that. In addition to that, keep in mind, we have a number of other growth drivers in that model. First of all, paid seed expansion within existing customers is the biggest driver, and even bigger than the migration factor that we've talked about, and that has been an area in the model that's been most impacted by macro headwinds over the last year. So a lot of your view on 25 is going to depend on macro outcomes.

Speaker Change: Outcomes than our opportunity to cross sell additional products to our over 300000 existing customers our ability to up sell to premium and enterprise editions of our products is another significant growth driver and then with a smaller impact other drivers like the free to paid conversion that we've talked about the price increases that we've made in new high growth products like compass gyro product.

Speaker Change: <unk> and I just pointed out we're in a super dynamic space right, now, particularly with AI and Theres a lot of opportunity to add value with solid execution. So we feel very confident in our ability to deliver healthy revenue growth over a multiyear period in the cloud and then obviously server is going to be zero essentially in two weeks when we get to the server into support so that's the color I'd give you for.

Joe Goodwin: Then, our opportunity to cross-sell additional products to our over 300,000 existing customers. Our ability to upsell to premium and enterprise editions of our products is another significant growth driver. And then, with a smaller impact, other drivers like the free to pay conversion that we've talked about, the price increases that we've made, and new high-growth products like Compass, JIRA product discovery, and Loom. And I just point out, you know, we're in a super dynamic space right now, particularly with AI, and there's a lot of opportunity to add value with solid execution. So we feel very confident in our ability to deliver healthy revenue growth over a multi-year period in the cloud. And then obviously, server revenue is going to be zero essentially in two weeks when we get to the server end of support. So that's the color I'd give you for now.

Speaker Change: Now we'll continue to update you over the course of the next six months, but thats, how I would that's where our mindset is and that's how I think about it directionally.

Speaker Change: Your next question comes from Seth <unk> from Citi. Please go ahead.

Seth: Thank you for taking my question I, just wanted to shift gears to tier service management, you're clocking in about 50000 customers.

Seth: Three three and half years from launch to about 20% of your B.

Seth: I was hoping.

Seth: Okay.

Operator: We'll continue to update you over the course of the next six months, but that's where our mindset is, and that's how I think about it directionally. Your next question comes from Fatima Boolani from Citi. Please go ahead.

Speaker Change: Quantitative color.

Speaker Change: Monetization curve looks like and when should we expect J F can become.

Speaker Change: At the large or rival the size of GRN conflict.

Michael Cannon: Thank you for taking my questions. I just wanted to shift gears to geoservice management. You're clock in about 50,000 customers since about three, three and a half years from launch, about 20% of your base. I was hoping to add some more quantitative color on what the monetization curve looks like and when should we expect a JSM to become as large or rival the size of JIRA and consulants as a revenue contributor to the bank? Thanks Fatima, I can take that.

Speaker Change: Yeah.

Speaker Change: Thanks.

I can take that.

Speaker Change: <unk>.

Speaker Change: We remain incredibly excited about.

Speaker Change: And the service management market broadly both in terms of Ikea service management and Enterprise service management for all functions within our business.

Speaker Change: I think we've done a really good job at continuing to grow that business.

Speaker Change: Alongside our other businesses that we have.

It's hard when you're playing catch up to about a decade to catch up on <unk> software and agile and Dev ops market.

Michael Cannon: We remain incredibly excited about... the service management market broadly, both in terms of IT service management and enterprise service management for all functions within a business. I think we've done a really good job at continuing to grow that business, alongside our other businesses that we have. It's always hard when you're playing catch-up.

Speaker Change: <unk> has the potential to do that and we continue to see it.

Speaker Change: Uh huh.

Speaker Change: Subscriber growth broad market that we have.

It's also worth noting that for a lot of our customers.

Michael Cannon: It's got about a decade to catch up on Jira software in the Agile and DevOps market. It certainly has the potential to do that, and we continue to see it as our fastest growing broad market that we have. It's also worth noting that for a lot of our customers, our strength is in the combination of the market. So people who buy Jira Service Management, some of them, as Scott mentioned, are migrating off expensive and legacy tools, and we see increasing numbers of switch-outs, which is always comforting to see.

Speaker Change: Our strength is in the combination of the markets. So that people, who buy tier of service management some of them as Scott mentioned in migrating off the expensive and legacy tools and we see increasing numbers of switch outs, which is always comforting to see.

Speaker Change: But more importantly, they are buying it because of our connection to.

Speaker Change: Developers in connection to.

Speaker Change: The wealth management market and brought up.

Speaker Change: Connectivity across.

Speaker Change: The organization.

Michael Cannon: But more importantly, they're buying it because of our connection to developers and connection to the work management market and broader connectivity across their organization. Increasingly, you're going to see a blending of this as software and technology become the core strategic advantage, and operating and delivering on that service alongside that is incredibly important.

Speaker Change: Increasingly you're going to see a blending of this as a <unk>.

Speaker Change: Software and technology become the core strategic advantage in operating and delivering on that service alongside that.

Speaker Change: <unk>.

Speaker Change: It is incredibly important so.

Speaker Change: I think we are.

Speaker Change: Very bullish on the long term monetization of tier of service management.

Speaker Change: TSM and ASM spaces broadly.

Michael Cannon: I think we are very bullish on the long-term monetization of Jira Service, and the ITSM and ESM spaces broadly. Both because of our competitive positioning, as we've seen and demonstrated this quarter and last quarter and the quarter beforehand, but also because of our connectivity to the two adjacent markets. Strategically why we're there.

Speaker Change: Both because of our competitive positioning as we've seen and demonstrated this quarter and last quarter on quarter beforehand, but also because of our connectivity to these two adjacent markets, which is strategically why we're there.

Speaker Change: In the first place Scott might have some some custom color do you want to add on top of that.

Yes.

Scott Farquhar: Monitored on the Ikea.

Operator: Yeah, we've got to sort of, you know, remind everyone that, like, IPSM is right in Atlassian Valley WIC, like, it really goes together. Our software, which is the development teams and all the other products we've got there work very closely with IT teams and increasingly so every single day. And that's something that only we deliver in this market. And we've been recognized actually, over the last few months for this; we were a leader in Forrester's ESM wave, where we received the highest possible score for strategy. And as a company that we've been doing this for a while now, but it wasn't the thing we started with, it's really comforting to see that we're being recognized for the unique things that only we can provide in the market.

Scott Farquhar: <unk>, it's rod.

Scott Farquhar: Early week like it really goes together.

Scott Farquhar: Our <unk> software, which is development teams and all the other products. We've got there we looked very closely.

Scott Farquhar: And increasingly so every single day, and that's something that only we deliver in this market.

Scott Farquhar: We've been recognized actually over the last few months by the way.

Scott Farquhar: We're a leader in <unk>.

Scott Farquhar: The same way.

Scott Farquhar: The highest possible score to strategy.

Scott Farquhar: And as a company that we've been doing it for a while now but it wasn't the thing you got it.

Scott Farquhar: Really comforting to say that we're being recognized for the unique things that only we can provide in the market and not only is that being recognized by analysts, but can you switch out story.

Operator: And not only is that being recognized by analysts, but key switch-out stories, right? We had a luxury travel company who's been a 15-year customer of one of our large competitors in the space who started out, who switched it up to JSM and switched away from that legacy vendor. And we see that again and again with a large logistics provider who moved 1,400 agents to JSM. So we've been strong historically in the SMB space. That's kind of where we started. We're increasingly... Price-based as well, as well as, you know, industry analysts. Your next question comes from Alex Lukin from Wolf Race. Please go ahead.

Scott Farquhar: Travel company he's been a customer of one of our large competitors in the study.

Scott Farquhar: He started out.

Scott Farquhar: Hey, Scott.

Scott Farquhar: Tim and switched away from that legacy vendor.

Scott Farquhar: Say that again and again, we've watched logistics provider.

Scott Farquhar: 800 agents to Jonathan So we've really been strong historically in the F&B space, that's kind of where we started we are increasingly seeing strength in the enterprise space as well as well as industry analysts are recognizing that.

Scott Farquhar: Okay.

Scott Farquhar: Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.

Joe Goodwin: Hey guys, thanks for taking the question. I want to maybe shift a little bit towards understanding the unlocking of kind of the OPEX and COGS basis post-migration. If we think about, you know, elevated COGS activity, salespeople continue to be focused on migration that, you know, start to unlock and focus on the cloud and cross-sell and up-sell, as well as the incremental R&D costs. What's the right way to think about that opportunity on the operating margin side in the OPEX portfolio as we get even into the next few quarters? Yeah, thanks, Alex. This is Joe.

Alex Zukin: Hey, guys. Thanks for taking the question.

Alex Zukin: Maybe shift a little bit towards understanding the unlock.

Alex Zukin: And kind of the Opex and Cogs basis post migration, if we think about elevated cogs activities salespeople continue to be focused on migration, but the.

Alex Zukin: Start to unlock and focus on cloud and cross sell up sell.

Alex Zukin: As well as the incremental R&D costs that you've been kind of putting into the entire platform as you can.

Alex Zukin: Been doing this over the last couple of years, what's the right way to think about.

Alex Zukin: That opportunity on what kind of the operating margin side and the Opex portfolio.

Speaker Change: We would go.

Speaker Change: We get even into the next few quarters.

Yes. Thanks, Alex This is Joe let me start with sort of our view of H two on Opex and then I'll touch directly on your question around the points of leverage we see from an opex and cost management perspective.

Joe Goodwin: Let me start with sort of our view of H2 on OPEX, and then I'll touch directly on your question around the points of leverage we see from an OPEX and cost management perspective. We'll see OPEX growth rates accelerate in H2, and this is really driven by two factors. One is the ongoing growth and investments in our core strategic priorities. Those are things like cloud and enterprise and artificial intelligence, ITSM, and the other core markets that we're in. And the other thing is more mechanical.

Joe: We will see growth of Opex growth rates accelerated in <unk> and this is really driven by two factors one is the ongoing.

Joe: Growth in investments in our core strategic priorities those are things like cloud and enterprise and artificial intelligence <unk> and the other the other core markets that we're in and the other thing is more mechanical it's we're lapping the benefit we received in H two last year from the restructuring and lower bonus expenses.

Joe Goodwin: It's We're lapping the benefit we received in H2 last year from the restructuring and lower bonus expenses. You've heard me talk about our philosophy overall on OPEX management. We continue to focus on maximizing return on every dollar spent.

Joe: You've heard me talk about our philosophy overall on Opex management, we continue to focus on maximizing the return on every dollar spent were focused on making disciplined prioritization and resource allocation calls and driving operational efficiencies as we gain scale.

Joe Goodwin: We're focused on making disciplined prioritization and resource allocation calls and driving operational efficiencies as we gain scale. I'd say the other factor to keep in mind that's over time, not necessarily in the immediate future, is on the other side of the significant multi-year investments in cloud and enterprise capability, we will have the opportunity to reallocate that investment to other areas that will drive long-term growth. And that will be another potential point of leverage for us as we think about it. In terms of gross margin, in general, gross margins will track with the revenue mix.

Joe: The other factor to keep in mind, that's over time not necessarily in the immediate future is on the other side of the significant multiyear investments in cloud and enterprise capability, we will have the opportunity to reallocate that investment to other areas that will drive long term long term growth and that will be another potential point of leverage for us as we think about it.

Joe: In terms of gross margin in general gross margins will track with the.

Joe: Revenue mix.

Joe Goodwin: Cloud gross margins structurally obviously have lower gross margins than our licensing business, so as that becomes a bigger mix of our overall revenue, that will put pressure on gross margins blended. At the same time, the mindset we have on cloud gross margins is to drive consistent year-over-year improvement through the great investments we're making on the engineering side to optimize cloud infrastructure to improve support. And so, again, you're right.

Joe: Cloud gross margin structurally obviously have lower gross margins than our licensing business. So as that becomes a bigger mix of our overall revenue that will put pressure on gross margins blended at the same time. The mindset. We have on cloud gross margins is to drive year over consistent year over year improvement through the great investments, we're making on the engineering side to optimize.

Joe: Cloud infrastructure to improve support.

And so again, you're right, we're going to big investments on post sale activity to drive deployment and usage and engagement and then we're going to have an opportunity to redeploy that and become more efficient over time and that will be part of that story. So that's the general framework on how we're thinking about both the cloud Cogs side as well as the Opex side going forward.

Joe Goodwin: We're going to make big investments in post-sale activity to drive deployment, usage, and engagement. And then we're going to have an opportunity to redeploy that and become more efficient over time. And that will be part of that story.

Michael Cannon: So that's the general framework on how we're thinking about both the cloud COG side as well as the OPEX side going forward. Alex, maybe I can just add a small bit of color from an engineering point of view. Philosophically, I think all world-class engineering organizations, any large fast food or fast pop company, should be working on continuing to optimize engineering costs. As you're running, as we are, an incredibly large cloud platform that's now geographically diverse, as you see from all the data residency improvements and other things, there are opportunities to save money effectively by running things more efficiently over time, and some of that learning comes from scale. Some of that learning comes from deployment. Some of that learning comes from new technologies. We certainly have a large investment as a world-class, world-leading R&D organization and Sometimes that money is returned, as Joe said, in the finances.

Joe: <unk>.

Joe: Okay.

Joe: Alex maybe I can just add a small bit of color from an engineering point of view, but philosophically I think.

Alex Zukin: All World Class engineering organizations in any large fast food company should be.

Alex Zukin: We are working on continuing to optimize engineering costs.

Alex Zukin: As youre running as we are an incredibly large cloud platform. This now geographically diverse as you see from all the data residency improvements and other things there are opportunities to.

Alex Zukin: I mean, effectively by running things more efficiently over time and some of that learning comes from scale. Some of that learning comes from deployment. Some of our lending comes from new technologies, We certainly have a large investment.

Alex Zukin: A world class World, leading R&D organization and continuing to do the things we did last quarter.

Alex Zukin: <unk> better faster and more efficiently.

Alex Zukin: That money is returned.

Alex Zukin: Joe said in the finances and other times, it's invested and other things so it might be we learn how to do things more efficiently.

Michael Cannon: At other times, it's invested in other things. So it might be we learn how to do things more efficiently and run systems and services more efficiently that then allow us to do things like data residency in a global sense. Other times, with things like Atlassian Intelligence, a lot of the AI features, it's about getting the features out first and then working out how to optimize costs over time.

Alex Zukin: And run systems and services more efficiently that then allow us to do things like that are residency.

Alex Zukin: Mobile.

Alex Zukin: The times and things like that last thing intelligence.

Alex Zukin: A lot of AI features it's about getting the pitches out first and then working out how to cost optimize over time as we watch customer usage patterns. We can work out how to scale and make that more efficient. So certainly something in engineering, we spent a lot of time.

Michael Cannon: As we watch customer usage patterns, we can work out how to scale and make that more efficient. So certainly something in engineering that we spend a lot of time working on, and we've had great results over the last two to three years is our cloud platform has grown. Complex, but also that. Your next question comes from Brent Thill from Jeffries. Please go ahead, Brent.

Working on and we've had great results over the last two to three years is our cloud platform has has grown.

Alex Zukin: Increasingly.

Alex Zukin: More complex, but also that gives us more leverage.

Alex Zukin: Your next question comes from Brent Thill from Jefferies. Please go ahead Brian.

Operator: Thanks. On Atlassian Intelligence, I believe it's GA now, and I'm curious if you could give us a sense of what we're seeing, what you're, and then ultimately the monetization path in AI. And I guess one of the questions we're getting is if you're seeing a faster move to DC versus cloud, does this slow your AI adoption pathway down or not? Brenton, I'm glad I can take that one.

Alex Zukin: Thanks.

Brent Thill: And then lastly intelligence I believe it's G&A now and I'm curious if you could give us a sense of what we're seeing what youre seeing and then ultimately the monetization path.

Brent Thill: I guess one of the questions.

Brent Thill: We're getting is if youre seeing a faster move to DC versus cloud does this slow your AI adoption pathway down or not.

Speaker Change: Brendan I'm glad I can take that one as I was worried about you all not asking that question until.

Michael Cannon: I was worried about you all not asking AI questions until well into the call. Just checking you're all okay there. Look, at a high level, Atlassian Intelligence and AI generally is a huge advantage for Atlassian. Like we deeply, deeply believe that it's a company that focuses on knowledge workers and unleashing the potential of every team. A company that has a huge amount.

Willing: Willing to the call just secondly were located.

Willing: Look.

Speaker Change: High level, allowing intelligence NII generally is a.

Speaker Change: Huge advantage for less like we deeply deeply believes that it is a company that focuses on knowledge workers and unleashing the potential of routine as it can.

Speaker Change: And there's a huge amount of.

Michael Cannon: The data that customers have entrusted us with, the ability to... Remix, Summarize, and give that data back in different forms for customers using a lot of these large language models and machine learning technologies is incredible. It's very exciting in terms of what we can deliver. As you mentioned, the initial Latvian intelligence feature set, largely GA during the quarter, has had fantastic customers. There's no other way to say that. We saw that when we announced it at Team 23 last year in Las Vegas, and we've continued to see that as we've worked with all of them. Early Access Program and then beta customers and now being in GA. The ability to change how people work in non-technical teams and in technical teams is just an unlock, right? We talk about our mission to unleash the potential of every team. It's literally doing that in fantastical ways.

Speaker Change: Data the customers who've entrusted us with.

Speaker Change: The ability to.

Speaker Change: Remix summarize and give that data back in different forms to customers using a lot of these last language models and machine learning technologies. This is incredible it's very exciting in terms of what we can deliver.

Speaker Change: As you mentioned.

Speaker Change: Initial Alaska intelligence feature set.

Speaker Change: Largely.

Speaker Change: When during the quarter. It has had a fantastic customer reception.

Speaker Change: There is no other way to say that we saw that when we announce it at $10 23 last year in Las Vegas.

And we've continued to see that as we worked with all of the early access program in beta customers and now being in Gi.

Speaker Change: The ability to change how people do work in non technical teams and in technical teams.

Is just an unlock we talk about our mission to unleash the potential of every payment it's literally doing that in.

Speaker Change: In fantastical ways.

Michael Cannon: We had more than 20,000 customers that used the features during the beta period, which for us, is fantastic. As far as the beta goes, it's sort of off the charts in terms of interest, which is fantastic. And as you mentioned, we do see... server and increasingly more of a data center customers, it being a factor in their IT BEING A FACTOR IN THEIR MIGRATION. There's a clear, logical understanding among customers that... Life Language Model-Driven and Machine Learning-Driven features are based in the cloud. It is another reason in a whole tapestry of reasons why customers are looking for this, and certainly has been really great. We're excited about the adoption of those features so far, really excited about IT intelligence, really excited about virtual agents and service management, continuing to drive straight efficiencies for customers, and again driving that movement up to premium enterprise additions as we've talked about beforehand. And lastly, as I mentioned earlier, Loom AI and the Loom Cloud Platform. Intelligence Faces that we did last month. Driving Great Adoption, that's it for us this week. Video More Efficiently.

Speaker Change: We had more than 20000 customers.

Speaker Change: Thats used to features during the beta period, which for us as.

Speaker Change: As far as the beta goes is sort of off the charts in terms of interest which is fantastic.

And as you mentioned, we do see.

Speaker Change: Silver and increasingly more of a data center customers.

Speaker Change: It being a factor in their movement Brian.

Being a factor in their migration, there is a clear and logical understanding among customers that the.

Speaker Change: Last language model, driven and machine learning driven.

Speaker Change: <unk> based in the cloud, which means that the customers move to the cloud in order to get access to those features.

Speaker Change: And it is another reason a whole tapestry.

Speaker Change: Reasons why customers are looking to move.

Speaker Change: And we've certainly seen really great.

Adoption of those features are really excited about lots of intelligence.

Speaker Change: Really excited about virtual virtual agents into your service management, continuing to just drive straight efficiencies for customers.

Speaker Change: And again driving that movement up to premium enterprise editions as we've talked about before him.

Speaker Change: And lastly, as I mentioned earlier.

Speaker Change: Intelligence features that we shipped.

Speaker Change: Last month again, driving greater adoption of learned because it's a different category than than the other and watching intelligence features but.

Speaker Change: The ability to create and consume video and more efficiently.

Michael Cannon: Quantum. So, I think our excitement could be higher and our commitment. Resources for standing in R&D to do this, equal to the best in the world. Your next question comes from Ari Tajanian from Cleveland Research. Please go ahead.

Speaker Change: It was really quite fantastic using and using some of these technology. So I don't think our time it could be higher.

Speaker Change: Our commitment and.

Speaker Change: The amount of resources, we're spending in R&D.

Speaker Change: Do this.

Speaker Change: Equal to the best in the World is Paramount for Us.

Speaker Change: Your next question comes from Orange to Johnny <unk> from Cleveland Research. Please go ahead.

Operator: Hello, thank you for taking the question. Strength in deferred revenue performance was notable. I was wondering if you could help unpack how much some of the newer initiatives around, such as Step Up Credit, Dual Licensing, Hybrid ELAs, as well as Atlassian Advisory Services help drive the strength in the larger enterprise deals there. How should we think about...

Johnny: Hello, Thank you for taking the question.

Johnny: Strengthen deferred revenue performance was notable I was wondering if you could help unpack.

Johnny: How much some of the newer initiatives around step up credits do a licensing hybrid elas as well as you know.

Johnny: Atlassian Advisory services helped drive the strength in the larger enterprise deals there and how should we think about.

Joe Goodwin: Some of those newer programs flowing through to revenue over the coming quarters, meaning to the extent there was dual licensing, how does that flow through to DC and cloud? And similarly, advisory services, how does that flow through to revenue, be it showing up in other or cloud or DC? Thank you. Yeah, thanks, Ari. This is Joe.

Johnny: Some of those newer programs flowing through to revenue over the coming quarters, meaning to the extent there was do a licensing how does that flow through to D C and cloud and similarly.

Johnny: <unk> services, how does that flow through to you.

Johnny: Revenue showing up in other or cloud or D. C. Thank you.

Johnny: Okay.

Johnny: Yes. Thanks, sorry. This is Joe Youre right, we were thrilled with our billings performance in the quarter. It was higher than we expected and was a record for the company. As you mentioned you see this performance in our unearned revenue balance, which accelerated to 30% year over year growth. You'll also see it in the remaining performance.

Joe Goodwin: You're right. We were thrilled with our billings performance in the quarter. It was higher than we expected and was a record for the company. As you mentioned, you see this performance in our under revenue balance, which accelerated to 30% year over year growth. You'll also see it in the remaining performance obligations, which increased over $1.9 billion. The outperformance there this quarter was driven by great sales execution that we talked about earlier, and that resulted in several large multi-year agreements. And those are the agreements that you were referencing, hybrid ELAs, and dual licensing.

Formats obligations, which increased over $1 9 billion. The outperformance there this quarter was driven by great sales execution that we talked about earlier and that resulted in several large multiyear agreements.

Johnny: And those are the agreements that you were referencing hybrid elas to a licensing they are having a material impact on our ability to grow our business in the enterprise space.

Joe Goodwin: They're having a material impact on our ability to grow our business in the enterprise space. I'd say the way you're going to see that show up is primarily in the form of migrations because a lot of that is targeted at establishing those relationships with our customers over multiple years. Many of those customers are using data centers as a stepping stone until they're ready to move to the cloud. It shows up both in the data center and in our cloud revenue rows from a P&L accounting perspective. We basically attribute revenue based on the relative list price between those two. It's roughly 50-50, give or take, between those two things as you think about the mechanical accounting of it.

Johnny: I'd say the way Youre going to see that show up is primarily in the form of migrations because a lot of that is targeted at establishing those relationships with our customers over multiple years. Many of those customers are using data centers, a steppingstone until they are ready to move to the cloud.

Johnny: It shows up both in a datacenter and cloud.

Johnny: Cloud revenue.

Johnny: Rose from a P&L accounting perspective, and we basically attribute revenue based on the relative list price between those two so it's roughly 50 50 give or take between those two things as you think about the mechanical accounting of it.

Johnny: Okay.

Joe Goodwin: Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for closing remarks. Thanks, everyone, for joining your call today from wherever you are in the world. We really, really appreciate you. As always, we also appreciate your thoughtful questions and continued support of Atlassian and the NALC. We look forward to seeing all of you hopefully at TEAM24 in Las Vegas at the end of April. With that, have a kick-ass time.

Johnny: Thank you that's all the questions. They have time for today I will now turn the call over to Mike for closing remarks.

Mike: Thanks, everyone for joining our call today from wherever you are joining the world. We really really appreciate you being here.

Mike: As always.

Mike: I also appreciate your thoughtful questions and continued support of Atlassian and analysis.

Mike: A small note we look forward to seeing all of you hopefully at $10 24.

Mike: In Las Vegas at the end of April.

Mike: And would that have a kitchen last weekend.