Q2 2025 Atlassian Corp Earnings Call
Scott Farquhar and Martin Lam Scott Farquhar and Martin Lam
Speaker Change: Good afternoon and thank you for joining Atlassian's earnings conference call for the second quarter of fiscal year 2025. As a reminder this conference call is being recorded and will be available for replay on the investor relations section of Atlassian's website following this call.
Speaker Change: I will now hand the call over to Martin Lam, Atlassian Head of Investor Relations.
Speaker Change: Welcome to Atlassian's second quarter of fiscal year 2025 earnings call. Thank you for joining us today. On the call with me today, we have Atlassian's CEO and co-founder, Mike Cannon-Brooks, and Chief Financial Officer, Joe Bin.
Speaker Change: Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2025.
Speaker Change: 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.
Speaker Change: As always, our shareholder letter contains management, insight and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A.
Speaker Change: This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties, and assumptions.
Speaker Change: With any such risk 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. We should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only after 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.
Speaker Change: Further information on these and other factors that could affect our business performance and financial results is included in filings we make with the Securities and Exchange Commission from time to time.
Speaker Change: including the section titled Risk Factors and our most recently filed annual and quarterly reports.
During today's call, we will also discuss non-GAAP financial measures.
Speaker Change: 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.
Speaker Change: 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: We'd like to allow as many of you to participate in Q&A as possible, so out of respect for others on the call, we'll take one question at a time.
Mike Cannon-Brooks: With that, I'll turn the call over to Mike for opening remarks.
Thank you all for joining us today.
Mike Cannon-Brooks: As you've already read in our sharehold letter, we executed well in Q2 as we scaled past $5 billion in annual run rate revenue.
driven by subscription revenue which grew 30% year-over-year.
Mike Cannon-Brooks: Our investments in our key strategic priorities of serving enterprise customers, delivering rapid innovation in AI, and breaking down knowledge silos with our system of work are driving momentum across the business and increasing customer commitment to the Atlassian platform.
Mike Cannon-Brooks: Companies like Cisco, DHL and Reddit are turning to Atlassian to help solve their toughest team collaboration challenges.
bridging the gap between their technology and business teams.
Mike Cannon-Brooks: and our world-class cloud platform with AI threaded throughout is delivering.
Mike Cannon-Brooks: With more than 20 years of data and insights on how software, IT, and business teams plan, track, and deliver work, we're uniquely positioned to help teams across every organization on the planet work better together.
Mike Cannon-Brooks: Today, more than 1 million monthly active users are utilizing our Atlassian Intelligence features to unlock enterprise knowledge, supercharge workflows, and accelerate their team collaboration.
Mike Cannon-Brooks: These features are clearly delivering value, as we're seeing the number of AI interactions increase more than 25x year over year.
Mike Cannon-Brooks: These powerful AI capabilities, along with automation and analytics, are also driving increasing adoption of premium and enterprise editions, with sales to higher value SKUs up over 40% year over year.
Mike Cannon-Brooks: With the breadth of our offering, the pace of innovation, and the recognition of our product leadership across all the markets we play in, the Atlassian platform is incredibly well positioned to further connect technology and business teams across the Fortune 500,000.
Mike Cannon-Brooks: We had some incredible customer wins in Q2, including a record number of deals, greater than $1 million in annual contract value signed during the quarter. With some of the largest companies in the world committing to the Atlassian cloud and embracing the Atlassian system of work.
Mike Cannon-Brooks: If you're interested in hearing more about the ongoing evolution of our go-to-market motion, check out the loom that I just posted to our IR website.
The progress we're making across our business.
Mike Cannon-Brooks: and the signals we're getting from our customers reinforces our conviction that we're making the right investments to help us scale to $10 billion in revenue and beyond.
Mike Cannon-Brooks: We're eager to get after it and build on this momentum, pushing ahead on our mission to unleash the potential of every team.
Mike Cannon-Brooks: With that, I'll pause the call to the operator for Q&A.
Speaker Change: We will now begin the question and answer session. If you have a question, please press star followed by the one on your phone. If you'd like to withdraw from the queue, please press star followed by the two.
Speaker Change: Your first question comes from Keith Sparkman from BMO Capital Markets. Please go ahead.
Keith Sparkman: Hi, thank you very much and congratulations on the solid results.
Speaker Change: Mike and Joe and Martin, I wanted to ask you about...
Speaker Change: The goals with really the larger enterprise accounts, Mike, in the shareholder letter, you reiterated the.
Speaker Change: sort of 10% of your revenues are being driven by the largest, you know, the large customers.
Speaker Change: And I really wanted to hear a little bit, Mal, about how you increase that penetration. Now, certainly part of it's go-to-market.
Speaker Change: In your loom, you referenced that you now have hundreds of sales reps.
Speaker Change: versus virtually none previously. Where does that go to, you think, over the next 12 to 18 months as you continue to try to penetrate the larger accounts? And secondly, from a technology perspective, where do you think you have the most opportunities?
Speaker Change: to harness the situation in terms of what product areas. I would think JSM would be the largest opportunity but I wanted to hear a little bit more about it because I'm not sure that would be JIRA's seat specifically on the software development side but love to hear any color on those two areas. Thank you.
Speaker Change: Thanks, Keith. Look, it's a broad question to start with, but look, I would say...
Presley
Speaker Change: We had a great Q2 in the enterprise segment, just fantastic execution by.
Speaker Change: the sales and success team across the board. So when you ask about which markets or which products.
Speaker Change: One of our advantages right now is a really broad scale growth profile.
JIRA, yes, continues to expand seats really strongly.
Speaker Change: business teams as well as technology teams. Again, we combined Jira Work Management and Jira Software together after the customer demand to do so because of the desire to connect their business and technology teams together. So that gives us a great expansion profile across those larger enterprises. There are lots of seats and lots of employees that we don't yet touch in most of those larger customers so that is a huge obviously growth vector for us going forward.
on the go-to-market motion just generally in the enterprise.
Speaker Change: I would say, look, we have a very highly effective flywheel, great financial profile, as I'm sure you're aware.
Speaker Change: That lands both small customers and big customers in terms of the size of the company, small team landing, but both of those.
Speaker Change: where we use our enterprise overlay as we keep evolving and adapting our go to market motions to make those customers.
grow it into a larger impact for that customer.
Speaker Change: As you see we have more than 500 customers spending a million dollars. We had a record quarter of 1 million dollar deals
Speaker Change: That is showing across the board of products across the set of markets we have.
Speaker Change: just great momentum as customers continue to pull us in. The CIOs and CEOs I speak to continue to want to form a deeper strategic relationship with Atlassian, not because of any single product we have, but because of our
Speaker Change: R&D speed, the innovation we're delivering, AI is just the latest example of that, but also the breadth of the platform, the amount of things they can see improving from their goals all the way down to the day-to-day work that they do. And it's really positive for us. It's really giving us a good sense of momentum.
Speaker Change: Your next question comes from Ryan McWilliams from Barclays. Please go ahead.
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Speaker Change: Thanks, Ryan. Look, Rovo, as all of the AI world, it's pretty early days, there's no doubt about that, in what's a massive change in the technology industry, which is a very positive change.
Speaker Change: I would say right now we are very pleased with the feedback we're getting from customers about what we are trying to build.
Speaker Change: The reception from customers, those who have proof of concepts running, those who've deployed, and those who have purchased, continues to be incredibly positive. Interest evaluations are all at really high levels as customers are realizing the value and also playing with these technologies in their own businesses and seeing how they can adapt and work.
Speaker Change: Obviously, at the broader level, as we've talked about with Alaskan intelligence, passing a million now is a major milestone for us, right, across all of the Alaskan intelligence features, which includes robo.
a huge milestone in the
Speaker Change: breadth of the usage that we have, which is always our number one thing that we try to do with Atlassian as a result of R&D. 25x improvement in the number of features used over the last year. And it is driving monetization at those premium and enterprise editions as we talked about with growth over 40% in those editions.
Done.
Speaker Change: In terms of Rovo and how it's trending in Autodev, we continue to invest heavily, I would say, in the R&D around all things AI.
Speaker Change: We continue to believe in our strategic advantages that we have there. With Robo specifically, that's around the quality of search, the depth and density of the teamwork graph to enable better answers for customers that are unique and differentiated.
Speaker Change: and the amount of data that we connect to. We shipped a whole lot of new connectors this quarter and there's even more coming in the quarter ahead to allow customers to really unlock all of the value in the knowledge that they have and enable them with agents to automate a series of different tasks, as you mentioned.
That saves their users, you know, hours to a week.
Speaker Change: In terms of Autodev and the development features, it continues to be an area we work on. It's right on the cutting edge. We are delivering a great number of...
completed pieces of software to customers and to ourselves.
Speaker Change: and an area that we will continue to invest in, but obviously feel incredibly bullish, building on the Atlassian intelligence stack and then the robo-agent platform. So it's.
Speaker Change: It's all staff that continues to go there, but great progress made so far, a lot of work still to do to continue to go and chase that customer value. We're excited to get after each quarter.
Speaker Change: Your next question comes from Michael Turin from Wells Fargo. Please go ahead.
Appreciate you taking the question. Impressive fiscal Q2 results, Joe.
Speaker Change: Given it's mid-year, just an update to the risk-adjusted framing at the start of the year. Any commentary you can add on?
Speaker Change: how things like expansion or tracking relative to what you're expecting and how to think about things like transition risk with Brian now starting alongside just any commentary on the second half guide assuming assumptions are still somewhat similar but
Speaker Change: you know your update on the pulse of everything is certainly
Thanks.
Speaker Change: Yeah, thanks for the question. It's a good one. So I'll start with the Q2 trends that we see in and I'll put in the context of the guide for second half.
Speaker Change: You know, as we mentioned, we've really benefited this quarter from a stable macro environment.
Speaker Change: and trends in the business were very consistent in Q2 to Q1.
Speaker Change: We saw continued signs of stabilization in our SMB customer segment and Botouch sales channel.
Speaker Change: paid seed expansion rates in SMB were stable to Q1 and top of funnel health remains healthy. So both of those feel like they're in a very good place having been stable for two plus quarters now.
Speaker Change: And then Mike's talked a lot about the enterprise trends. Overall, very healthy and consistent with Q1 and excellent results on annual and multi-year deals.
Speaker Change: migrations, and upsell to premium and enterprise editions of our SKUs.
Speaker Change: In terms of the guidance philosophy for H2, you know, we highlighted at the start of the year that we had taken a different approach to our guidance this year.
Speaker Change: We're obviously continuing to grow that number as fast as we can with great features that led us loan in the <unk> right ultimately customers and users don't use an AI model. They use a piece of software they use on pi level technology to interact with an agent how that interaction works everything below that is up to us to do in terms of the date of the models and the R&D.
Speaker Change: We feel.
Speaker Change: Really confident in our unique positioning and are going to continue investing behind behind that trend.
Speaker Change: Your next question comes from Cortina Bolani from Citi. Please go ahead.
Speaker Change: Good afternoon, and thank you for taking my question.
Speaker Change: Mike.
Speaker Change: Still the kind of the the virtues of the Luna.
Speaker Change: Capability, it's been a homerun, so really getting really strong adoption in your body and they really did share some remarkable.
Speaker Change: Thanks.
Speaker Change: Engagement and adoption.
Speaker Change: I was hoping you could spend a little bit of time quantifying the monetization and the uplift that you're potentially seeing.
Speaker Change: Hey, your cloud performance ads alone.
Speaker Change: <unk> seen some of your strongest and largest flagship product I don't believe is included in your premium additions, but I would love some clarification and how thats actually moving the needle for you on that.
Speaker Change: Thank you.
Speaker Change: Hi, This is Joe and I'll pass it over to Mike for color on this.
Speaker Change: We don't provide the specifics on rooms revenue our growth rate on a quarterly basis Youre right that we are pleased with the growth we're seeing and we're excited by the customer reaction to the recent AI innovations, we've been introducing into the boom product line.
Speaker Change: In terms of performance in the quarter room revenue in Q2 was in line to slightly better than our expectations and you may recall, we did give some guidance on the size of the wound business. When we provided FY 'twenty five guidance that we said it would be about one five points of impact to FY 'twenty five cloud revenue growth for the year and so you should be able to use that to back into a rough size of the.
Speaker Change: Magnitude of that business.
Speaker Change: Sure for Tina.
Speaker Change: Look <unk> is doing very well there is no doubt about that and we continue to.
Speaker Change: Invest in the opportunity that we see there.
Speaker Change: I would probably break that answer into three parts for me firstly.
Speaker Change: <unk> at the acquisition and the reason that we as a company fell in love with Luna and use it so heavily and then brought it into the Atlassian family.
Speaker Change: The.
Speaker Change: Our ability to communicate and collaborate through video.
Speaker Change: In rapid form, bringing a really human element to the workplace.
Is certainly.
Speaker Change: Resonating with customers rather than a more distributed work environment in lots of different areas. That's a really powerful device and it is a unique.
Speaker Change: Capability, it's very different to just quote unquote video per se.
Speaker Change: It's very collaborative.
Speaker Change: It's very rapid to create most.
Speaker Change: Secondly.
Speaker Change: <unk> is playing out well in the video space both on the creation side, you see that in Luna AI.
Speaker Change: More than 38 million videos last year, using <unk>, which is a huge number if you think about it in terms of the amount of communication and the density of information contained into video.
Speaker Change: AI is helping us on the creation side lots of editing tweaks titling. These sorts of things chapter Ing is doing really well, but also on increasingly the actual modification of the video.
Speaker Change: In terms of removal of stop words or.
Allowing people to edit the video like attach.
Speaker Change: Attached document this is a really important innovation area for us that we continue to invest in and I think are doing some really good work in a practical application of AI video in the workplace.
Speaker Change: On the consumption side also.
Speaker Change: Obviously helps you to consume large amounts of video in various ways, giving you summaries incentives, we're seeing that with the <unk> acquisition, that's moving into meeting some reason other areas and generally loons ability to be a.
Speaker Change: Search archives full lots of slots of video in the enterprise.
Speaker Change: And the teamwork grass and integration that atlassian are really bringing that to the full so we feel really strongly about the loom roadmap.
Speaker Change: Not included at the moment in any of the premium more enterprise additions I think you mentioned confluence or its a standalone SKU in and of itself.
Speaker Change: Your next question comes from DJ Hynes from Canaccord. Please go ahead.
DJ Hynes: Hey, Thank you guys congrats on a nice quarter.
Speaker Change: Joe We obviously you have your guidance for data center growth in Q3, but can you just unpack a bit of what underpins those assumptions that there are a number of moving parts here in Q3 with the pricing changes the potential for early renewals to lock in pricing I think you've made changes to partner commissions, just help us kind of wrap our arms around that and what youre factoring into.
DJ Hynes: The growth rate for Q3.
Speaker Change: Yes, great question. Thanks for asking our Q3 data center guidance for revenue is approximately 7% year over year growth.
Speaker Change: That reflects growth driven by pricing seat expansion and cross sell which we believe will remain healthy, but somewhat impacted by macro uncertainty and execution of our high touch sales channel that I mentioned earlier.
Speaker Change: As well as continued momentum in migration to the cloud as we continue to deliver significant improvements in the enterprise great capabilities and the value to our cloud platform.
Speaker Change: And as we continue to help our data center customers migrate and then lastly recall that we had significant growth in the prior year Q3 related to server end of support and pricing changes and that creates a very challenging growth comparable this year.
Speaker Change: In terms of the pricing change, we haven't seen any significant or unexpected change in customer behavior from the recently announced datacenter price changes historically, there have always been fairly predictable changes in customer purchasing patterns with whenever we implement those price changes.
Speaker Change: And so when we have those in the plans we model out the expected impact and we incorporate that into our revenue guidance, which is what we've done this year for the February data center price increases the increases this year are slightly higher than in the past and we've tried to take a prudent and conservative approach of incorporating that into our guidance and with respect to those price increases we haven't seen anything unusual to date realm.
Speaker Change: They've to historical experience or our expectations in terms of deal pull forward. So we feel like we've captured that in the guidance.
Speaker Change: Okay.
Speaker Change: Your next question comes from Brent Thill from Jefferies. Please go ahead.
Speaker Change: Thanks, Joe good upside on margin relative to the street I guess for the guidance Youre not really flowing that magnitude of margin beat.
Speaker Change: And then into the guide and maybe if you can just discuss where those investments are going is there is there. Some one time investments that you still need to clean up just give us a sense of what's happening in the back half of the fiscal year.
Speaker Change: Yes. Thanks for the question Brent It's a good one in terms of the rest of the year, we are expecting operating margins in <unk> to be slightly lower than H. One. This is driven primarily by two factors on the cost side as you pointed out. The first is spending we expected to occur in Q2, but actually pushed to H. Two so thats a timing issue and then the second relates to something.
Speaker Change: Mike talked about earlier on the call and that we are going to slightly increased sales and marketing and R&D investments in the enterprise space in H, two and Thats given the strong positive signal, we're getting there on the progress and the momentum and the returns on our existing investments. We believe we can accelerate progress in that are strategically important area of our business. So we're going to invest against.
Speaker Change: That and so when you add all that together for the full year, we expect our non-GAAP operating margin to be roughly flat year over year at 23, 5% and that's despite the challenging prior year comps related server at the support so overall I feel very good about the expected trajectory of operating margins through FY 'twenty, five and how that lays a good foundation heading into FY 'twenty six and then.
Speaker Change: Lastly, I would just say I continue to expect we will deliver greater than 25% non-GAAP operating margins in FY 'twenty FY 'twenty seven consistent with our guidance at Investor Day in May.
Speaker Change: Just wanted to add on one thing we.
Speaker Change: From a broader color perspective, we're incredibly excited about those go.
Speaker Change: Go to market investments that Joe talked about.
Speaker Change: There'll be more.
Speaker Change: A little bit of time as we.
Speaker Change: Drive that part of the business further forward.
Speaker Change: And to reiterate that.
Speaker Change: The long term targets, we gave it.
Speaker Change: At the analyst day last year, probably about nine months ago.
Speaker Change: In terms of the general moderated.
Speaker Change: Kris and go to market investments as a proportion of total revenue in the moderate decrease in R&D, while those two still maintaining sort of historical levels. Those long term targets are still applicable in all the guidance suggests ultra.
Speaker Change: Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.
Kash Rangan: Sure. Thank you very much there's been.
Speaker Change: A lot of discussion of consumption models that are interrelated with the subscription of.
Speaker Change: Curious to get your thoughts.
Speaker Change: Mike and also with respect to the price increase are you going to be.
Speaker Change: The offering certain things that will justify the price increase because you have had one series of price increases that we went through a couple of years ago.
Speaker Change: And I'm curious how what has been the customer feedback is it because the tradeoff is that okay, we're going to get something more by where features maybe theirs.
Speaker Change: Consumption overlay on top of the future.
Speaker Change: <unk> roadmap.
Speaker Change: How do we rationalize the price increase in return for the value of that.
Speaker Change: Customers are getting from that legacy and thank you so much.
Thanks, Kash, let me take those in reverse order.
Speaker Change: Firstly on the price increases look we have a long history of continuing to optimize price across our portfolio and in line with the value that customers are getting.
Speaker Change: Whenever I talk to customers.
Speaker Change: I remind them of the heavy R&D investment, we have which ultimately results in.
Speaker Change: Product improvement and we have a great history and track record of delivering continued product improvement.
Speaker Change: So our product gets 25, 30% better every year as we continue to build out the feature set.
Speaker Change: Our customers do realize that that is worth.
Speaker Change: A moderately increasing price and as always philosophically, we keep the value delivered vastly ahead of any.
Our pricing philosophy, so that tends to resonate really well with customers and is very clear to them. They see our investments they see the results of those investments and that generally.
Speaker Change: With it broadly.
Speaker Change: On the consumption side.
Speaker Change: Look a very hot topic it seems suddenly.
Speaker Change: <unk>.
Speaker Change: Quite a good history in this area I would say, obviously, we have a lot of elements of consumption based pricing already across the portfolio.
Speaker Change: That's already in our results that you see today from a bit bucket pipelines through.
Speaker Change: Curious service management with both.
Speaker Change: <unk> and assets.
Speaker Change: In the ROFO and lastly, intelligent spaces automation.
Speaker Change: Storage and now with four inch so consumption based pricing is something we are very familiar with.
Speaker Change: I think over time.
Speaker Change: It probably will feather into be a broader pace of the overall mix, but again, we continue to learn and adapt as as that grows something we are quite familiar with over time in terms of pricing there.
Speaker Change: There are definitely areas of <unk>.
Speaker Change: Enterprise, SaaS broadly or our business, where within some sort of subscription offering you get a certain amount of usage of a given.
Speaker Change: Facility, let's say and then at some point you'd pay for more of that facility, which is.
Speaker Change: Orthogonal to your usage of site users or whatever the core billing unit is familiar bucket pipelines is a great example, you might have 50 developers on bit bucket.
Speaker Change: He builds you run and how much CPU. Tom you use is kind of up to you can use billions of minutes. So you can use tens of minutes.
Speaker Change: Because of the scalable nature of computing.
Speaker Change: <unk> tend to understand if they use more minutes El Paso, that's top lines and again as long as we keep that value delivery ratio rod.
Speaker Change: Good deal for everybody concerned.
Speaker Change: I don't think its particularly different to the broader consumption base philosophies, we have.
Speaker Change: Something that we continue to.
Speaker Change: The work on the data and again, it's all about us learning and adapting with customers and making sure that they see the value theyre getting before.
Speaker Change: That price comes in or the Bill comes in and I feel comfortable about what they're thankful.
Speaker Change: Your next question comes from Rob Owens from Piper Sandler. Please go ahead.
Rob Owens: Great. Thank you very much for taking my question and Joe just wanted to drill down on the gross margin performance and you did speak to in the letter higher gross margins on the cloud side. So just how sustainable is that moving forward is that a moving target with some of these new subscription services get rolled out and.
Speaker Change: As you look at achieving that.
Speaker Change: Operating margin, where should gross margins be in that timeframe. Thanks.
Rob Owens: Yes. Thanks for the question, Rob gross margins were 85% this quarter that was solidly better than our guided range of 84%.
Rob Owens: And that was driven by two things one is the revenue outperformance and then lower than expected cloud Cogs in the quarter. It was also up about 100 basis points year over year, and that's because of the higher cloud gross margins are partially offset by the revenue mix shift to cloud in <unk>.
Rob Owens: Cloud specifically, we continue to benefit from price increases up sell to premium additions and engineering investments, we're making to optimize cloud infrastructure and customer support costs.
Rob Owens: So focusing on and managing cloud Cogs efficiently now is particularly important given the expected growth we expect in that part of the business.
I would also say this highlights one of the many benefits of the engineering investment model that Mike talked about earlier that we have here at Atlassian and that we can invest in engineering talent that can be deployed to many things, including solving tough technical challenges that unlock these cost savings and efficiency improvements.
Rob Owens: And certainly our cloud customers. In addition to product innovation and I would just say there has been really great work by our engineering and support teams in this area and there is more to come on that so overall, we feel really good about the performance there and the overall performance on gross margins in terms of long term operating margin guidance at.
Rob Owens: At the Investor Day, we mentioned that we expected gross margins to be lower over the next three years, just given the mix shift in revenue to cloud.
Rob Owens: We're obviously going to continue to work really hard to reduce those cloud cogs and to optimize cloud gross margins.
Rob Owens: It is still the way, we think about the long term and that with the shift in revenue to cloud.
Rob Owens: Which has structurally lower gross margins that will offset more than offset the improvements that we think we can drive on the on the cloud gross margin side, so that guidance from the Investor Day last may still holds.
Rob Owens: Yeah.
Adam Tindle: Your next question comes from Adam Tindle from Raymond James. Please go ahead.
Adam Tindle: Okay. Thanks, Good afternoon, I wanted to start on cloud growth, maybe with Joe paid seat expansion was above your expectation again next quarter, just maybe level set and remind us where we are on seats I know, it's been kind of stable along the bottom sequentially, but not really growing is that metric returned to growth yet and if not maybe.
Adam Tindle: The timing of expectation on when that might return to growth and Mike on this topic, it's relevant because investors are paying attention to the potential for AI in all of this innovation to cannibalize seats.
Adam Tindle: Do you understand kind of that fear structural fear now that you're deploying AI yourself and seeing it in practice I Wonder if you might revisit.
Adam Tindle: Structural theme with AI eating seat.
Adam Tindle: Yes, thanks for the question on the.
Adam Tindle: Paid seat expansion in the cloud specifically, we are seeing absolute growth in the expansion, but the rate has been stable quarter to quarter Q2 to Q versus Q1.
Adam Tindle: That has been stable for several quarters.
Adam Tindle: Within that overall paid seat expansion rate, we've discussed weakness in SMB. The good news that we see is that debt pay down.
<unk> expansion rate in SMB has stabilized over the last two quarters. So from our perspective, we feel like we have stabilized there.
Adam Tindle: Don't have a timeline on when do you expect that to turn around a lot of that is driven by macroeconomics.
Adam Tindle: We talked about the approach to guidance, we continue to assume that macroeconomic uncertainty will have an impact in future quarters on that paid seat expansion rate and thats baked into the guidance, but beyond that we don't have a very specific view on when do we expect that to turn around and start to expand again.
Adam Tindle: Okay.
Adam Tindle: And Adam I can.
Adam Tindle: Talk to the second one on cannibalization.
Adam Tindle: <unk>.
Adam Tindle: Look we take a pragmatic view on there so I would say.
Adam Tindle: I understand the concerns that people have the float around I don't think were seeing any signs of that at the moment, we're going to continue to be watchful.
Adam Tindle: The reason I believe we are not seeing those signs as.
Adam Tindle: Jenkins paradox has floated around a lot in the last week or two.
Speaker Change: Joe I'm familiar with that from the from the energy space, but fundamentally it does apply here, Rob we don't have a shortage of ideas of things that we want to bring into reality that software help us with technology is quite atoning I'd into actual services or products.
Speaker Change: We are not constrained by supply of ideas and human creativity. So anything that guidance. These efficiencies with all of the short term bumps that we can have generally we will refill.
Speaker Change: Consummation of profits and other things in the longer term Brian.
Speaker Change: Most of the tasks that we're removing generally not things that people want to do that not to create as part of the job and so we're allowing people to have higher fundamental efficiency and doing that job whether that means lots of parts of the economy will suddenly be done with magic with smaller numbers of people I'm not sure I believe that I think they will come up with many more things to do it right, but it does make users.
Speaker Change: Formal productive and Thats generally a broadly good thing for us all.
Speaker Change: We are seeing with customers increased productivity in the.
Speaker Change: 123 hours a week.
Speaker Change: And broadly across the set of knowledge workers. This is this is fantastic.
Speaker Change: If those people are going <unk> I think they are probably taking up the next things on their task was to do so as an example of sort of.
Speaker Change: Most people don't end the week in a knowledge where job with an empty list of tasks. This just helps them get through more stuff more quickly and helps us firms.
Speaker Change: Survive and thrive in a competitive industry wherever they are they are competing and someone else. It's also trying to gain those efficiencies.
Speaker Change: From a.
Speaker Change: Thoughtful point of view again, as we mentioned, we do have consumption based pricing kind of make sure that that's there at lots of different areas of the business certainly in the OFC and intelligence area.
Speaker Change: And we will continue to learn and evolve whether that turns into task based pricing or job based pricing, we would be ready to adapt to that if that seems like an area. That's growing that way. We don't have a lot of customer signals that that's what's desired yet.
Speaker Change: From Atlassian point of view, we maintain that flexibility to be able to capture that value as we as we get there. The first thing for us to do is to build fantastic products that people really want and will consume in volume.
Speaker Change: Secondly, we have.
Speaker Change: Still a relatively small penetration within most of our largest enterprise customers. So the upside there is.
Speaker Change: Very hard for us, we feel and that's what we continue to Josh.
Speaker Change: Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead.
Gregg Moskowitz: Great. Thank you.
Gregg Moskowitz: To follow up on <unk> question from earlier, because it is fascinating that you'd have 85% of the fortune 500, and yet they only make up 10% of your revenue might can you touch on how challenging do you think the path is there may be for Atlassian to get in front of C level executives a lot more frequently and how does Brian and the rest of the team plan too.
Gregg Moskowitz: Material you go after that.
Greg: Alright, Alright, Greg.
Speaker Change: Not challenging I'm trying to look at how to answer this question.
Speaker Change: Is it hard for me to get in front of C level executives or Brian or the Atlassian sales team, where atlassian broadly no I would say, it's not hard for us to do that.
Speaker Change: <unk>.
Speaker Change: Tandem is probably almost into one hundreds now in the last 12 months of C level executives across massive organizations all over the world, They're all atlassian customers.
Speaker Change: They are all looking to increase their atlassian spend they have.
Speaker Change: Had very high demands of Atlassian, that's great. We lost customers that are demanding that have high requirements in hind AIDS and it's up to us to deliver those.
Speaker Change: See our continued delivery of value, whether thats style and.
Speaker Change: In performance and compliance and cloud fed ramp all the facilities that Joe talked about in terms of.
Speaker Change: Enterprise requirements is a long list and it's going to continue to get longer as we get to lots more global regulation and different rules.
Speaker Change: Were all up for delivering excellent customers and at the same time delivering them fantastic products that actually make a big impact on their business.
Speaker Change: Getting in front of them is not the problem continue to be told in the state wants to have us be a largest strategic partner.
Speaker Change: I love customers I met with a large telco.
Speaker Change: In Europe that explained to me.
Speaker Change: Wanted us to be one of their top four strategic vendors.
Speaker Change: Australia Dauntingly large technology companies that we are increasingly put enlist with which is very humbling and then they presented us with a list of things that we'd need to do to get there and we're probably in that top 20 vendors top 10, maybe today and they wanted us to be and it's helpful. I was like give me the list, let's go and.
Speaker Change: We're working on a lot of things on that list already with delivering for that particular, Linda what they saw with the power of the Atlassian platform.
Speaker Change: Very insightful CIO that saw the breadth of what we're doing across what we call. The assistant with work so connecting a technical and business teams together as one of the biggest problems strategy and planning.
Speaker Change: Hi.
Speaker Change: The depth and breadth of the tumor graphing a truly unique data asset for them that they don't have big problems connecting all the data together.
Speaker Change: So.
Speaker Change: We love those most complex and demanding businesses, we don't have problems getting in touch with them we're getting it.
Speaker Change: To talk to them, we are continuing to improve the way that we tell the atlassian story to explain to them, how we can help and continuing to help them get that value Foster.
Speaker Change: Ryan one of the things we pride ourselves on is on speed of deployment speed of getting access to that again and enterprise search. It's no different you can get our enterprise search engine stood up very very quickly you can connect to lots of enterprise data very very fast and get results.
Speaker Change: And if we keep that philosophy in mind and deliver on all their requirements in terms of compliance regulation scale performance etcetera, I think we stand in a really good stead.
Speaker Change: I think Brian and the success team just continue to.
Speaker Change: Deepen our capabilities in those areas. So we feel very bullish about that part of the business.
Speaker Change: Your next question comes from Jason <unk> from Keybanc capital markets. Please go ahead.
Speaker Change: Great. Thank you for fitting me in in the shareholder letter it looks like data center.
Speaker Change: Strong large deal activity.
Speaker Change: I don't know if this is referring to renewals or new land, but I know, it's going to be a multiyear journey on migration.
Speaker Change: For this cohort of customers that are renewing these multi year data center and contracts today.
Speaker Change: What is holding them back from the cloud.
Speaker Change: At the moment alright, thank you.
Speaker Change: Jason I can I can take the first part of that and Joe might want to follow on from <unk>.
Speaker Change:
Speaker Change: Our financial perspective.
Speaker Change: Look I think the first thing I would say is.
Speaker Change: I don't run into any data center customers Nowadays.
Speaker Change: Going to cloud, they're all when they're all making plans to move.
Speaker Change: They are not questioning our abilities and that's that's credit to the engineering team broadly over the last few years delivering on a lot of those compliance and regulation and needs of those businesses as we talked about.
Speaker Change: That for a lot of these very large and complicated enterprises, so they might have.
Speaker Change: And $30 50, even 100 data center instances around the enterprise.
Speaker Change: Often smartly looking to do some cleanup on the way through.
Speaker Change: About the workflows they are using or the data some of those instances are 20 years old plus.
Speaker Change: And have a lot of.
Speaker Change: Legacy content in them that they may not need et cetera. So that's a process fundamentally it can take some of those businesses. Some some time to move suddenly often a lot of time multiple years to move Holistically, maybe all of those 50 to 100 instances right that doesn't mean, they're not moving into hybrid sites, we increasingly see the hybrid offering as.
Speaker Change: A powerful thing for those customers to learn about cloud test cloud use cloud and maybe the most forward thinking parts of the business or are they more fast moving parts of the business a.
Speaker Change: A lot of people moving their AI initiatives for example to the cloud is something I've talked to a number of customers about.
Speaker Change: And some of the slower moving more legacy parts of the business May move later on so we want to make sure that we give the customers that flexibility to be customer led in how they manage that migration journey for themselves. It's very unique for a lot of those.
Speaker Change: Big customers at the same time, making clear to them about where we are headed as a business demonstrating the value of cloud and again, we continue to have large <unk>.
Speaker Change: <unk>, we had the financial institution that we talked about last quarter in the shareholder letter that had signed a very large cloud deal.
Speaker Change: On the basis of Atlassian intelligence and analytics to fundamental capabilities that they saw is powerful in the cloud.
Speaker Change: Moving their migration Brian.
Speaker Change: So thousands success, there and doing a fantastic job.
Speaker Change: Cros.
Speaker Change: Customer base, especially in our largest area to explain to customers what the value is and help them on those.
Speaker Change: Those movements southern area, we feel pretty bullish on Joe do you want to follow on the finance part.
Joe: Yes, Mike Jason the only point I'd make is to reinforce Mike's point that the vast majority of these deals and datacenter where hybrid.
Speaker Change: <unk>.
Speaker Change: Which give the customer rights to the cloud and we continue to see really strong interest in these hybrid deals given the value and the flexibility they provide specifically.
Speaker Change: Specifically to our largest customers and Mike talked about all the benefits that brings in our ability to migrate.
Speaker Change: In a way that makes the most sense for them and these deals were a significant driver of the billings outperformance in the quarter that you see even though they were less of a driver of revenue performance just given the revenue recognition on these deals so hopefully that color helps as well on the big deals in the datacenter space.
Speaker Change: Thank you that's all the questions we have time for today.
Mike: I'll now turn the call back over to Mike for closing remarks.
Mike: Thank you everyone for attending today and thanks to all of the Atlassian team for a fantastic quarter and huge progress across R&D and customer delivery across marketing and cross sales success and all of the G&A functions that support us all so.
Mike: Another quarter in the books. Thank you to everyone for attending and we look forward to.
Mike: Talking to you all in three months and also seeing you in Anaheim hopefully a lot of.
Mike: At $2 25 in Anaheim in Idaho.
Mike: Thank you very much tied to take carefully.
Mike: [noise].
Mike: Okay.