Atlassian - Q1 2024

Transcript

Operator (participant)

Good afternoon, and thank you for joining Atlassian's earnings conference call for the first 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.

Martin Lam (Head of Investor Relations)

Welcome to Atlassian's first quarter of fiscal year 2024 earnings call. Thank you for joining us today. Joining me on the call today, we have Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes, Chief Revenue Officer, Cameron Deatsch, and Chief Financial Officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our first quarter of fiscal year 2024. The shareholder letter is available on Atlassian's Work Life blog in the Investor Relations section of our website, where you will also find other earnings-related material, including the earnings press release and the supplemental investor data sheet. As always, our shareholder letter contains management's insights and commentary for the quarter. So 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 include 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. We 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. We undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these or 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, including the section titled Risk Factors in our most recent filed annual and quarterly reports. During today's call, we will also discuss non-GAAP financial measures.

These non-GAAP financial measures are in addition to, and are not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. 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. We'd like to allow as many of you to participate in Q&A as possible. 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.

Scott Farquhar (Co-CEO and Co-Founder)

Thank you for joining us today. As you've already read in our shareholder letter, we've been busy. We kicked off FY 2024 by executing well and playing defense. We continue to push hard on our biggest bets, Cloud, Enterprise, and ITSM, and those bets continue to pay off. We're also shipping ever more new products and innovation to our customers. This quarter, we launched Compass into general availability. This is on the heels of launching Jira Product Discovery last quarter, which is off to a fantastic start with several thousand customers already. I was just at our High Velocity IT service management event here in Sydney when we announced the general availability of virtual agents in Jira Service Management, and debuted a host of additional AI capabilities.

We heard from some of our incredible customers, who shared how they migrated their legacy ITSM solutions to Jira Service Management and are now delivering exceptional service experiences faster than ever. Through our cloud platform, thousands of customers through our early access program are already realizing value from the AI capabilities we've introduced across our cloud products, powered by Atlassian Intelligence. The early feedback has been terrific, and we're incredibly excited by the opportunities that AI presents us. Along with the organic innovation happening here at Atlassian, we're also announced our acquisitions of AirTrack and Loom. AirTrack builds on our previous investments in IT service management and will enable enterprises to better account for and trust all their critical assets within their organizations. Loom, which has a passionate customer base of 200,000, will bring the power of asynchronous video messaging to the Atlassian platform.

We firmly believe distributed work is here to stay, and Loom will allow teams across the globe, or even in the same building, to collaborate seamlessly in deeply human ways. People are increasingly turning to video as a way to collaborate and consume information, and we're incredibly excited about the opportunities that video can be applied across our platform. Our customers are looking to Atlassian to provide them solutions in the collaboration space, and Loom gives us an incredible opportunity to further unleash the potential of their teams. We're also playing offense on talent. Atlassian is the cornerstone of our success, and we're focused on adding and retaining amazing talent across the company, including great senior leaders.

We recently welcomed Zeynep Ozdemir as our Chief Marketing Officer, and Vikram Rao as our Chief Trust Officer, and we promoted Kevin Egan to Chief Sales Officer, all of whom bring great experience to our leadership team. I also want to acknowledge Cameron as this will be his last earnings call with us. Mike and I are incredibly grateful for his 11 years of dedication, impact, and most of all, friendship. With that, I'll pass the call to the operator for Q&A.

Operator (participant)

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. Your first question comes from Ryan MacWilliams from Barclays. Please go ahead.

Ryan MacWilliams (Software Equity Research Analyst)

Appreciate you guys taking the question. I would love to just double-click on the timing of the remaining migrations. I would think at this point, there might be a little more Server revenue, still in the model than investors expected. So any expectation for, like, when those remaining migrations will move over and the composition of, those remaining customers? Like, are they more likely to go to Data Center or Cloud from here? Thank you.

Cameron Deatsch (CRO)

Yeah, this is Cameron. I'll take the first here, and then I'll have Joe follow up. So, as many of you know, we have the Server end of life coming up in the next few months, mid-February.

We will cease all support for Server customers after that date. Over the last few years, we've been actively, aggressively, going up to all of our customers across Server and Data Center, attempting to get them to the Cloud. This has been very positive for us. It's gone very in line with our plans over these few years. But obviously, there are many customers out there that will wait till the last moment before they make this decision. We see that today in our enterprise pipeline. We have healthy pipeline with enterprise migrations going up over the next few months. As far as what I wanted to make sure that it's very clear here is, you know, post-February, we still will have many migrations.

So many customers between now and February will be going from Server to either Data Center or preferably Cloud. But for those customers that choose Data Center, we will continue to be migrating those Data Center customers to the Cloud in the coming years. So the short answer there is, yeah, we do expect to see a flurry of activity over the next few months with that big compelling event in February, but migrations will continue post the February date. Joe, you have anything to add?

Joe Binz (CFO)

Yeah, thanks, Cameron. Ryan, really no change from what we discussed last quarter in terms of the, Server end of support dynamics that are baked into our guidance. As Cameron mentioned, we end support for Server products in 2024. There may be significant quarter-to-quarter variability, as Cameron mentioned, based on when and how those Server customers ultimately choose to migrate. We continue to assume the percentage split on migrated seats between Data Center and Cloud will be relatively consistent with historical trends up to that end of support moment. And then with end of support, we continue to expect most of those remaining Server seats that migrate will migrate to Data Center, and we continue to hold prudent assumptions to account for customers who will choose not to migrate in FY 2024, and that's also factored into our guidance. Hope that helps.

Operator (participant)

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

Karl Keirstead (Managing Director of Software Equity Research)

To just ask about your observations about the macro. I think every investor on the line is seeing some challenges across the space with, I'd say, a bit of a skew towards some pressure in the SMB space. Could you talk about the trends you're seeing, SMB versus enterprise, and then perhaps elaborate on the seat growth comment you made in the prepared remarks? Thanks so much.

Joe Binz (CFO)

Yeah, great question, Karl. Thanks, thanks for asking. You recall by the end of Q4, we were seeing signs of improvement and stabilization in SMB and a very healthy enterprise environment. Those trends continued into Q1 and played out largely as we expected during the quarter. Now, keep in mind, Q1 is typically not a big quarter for us when it comes to large enterprise deals, and we have significant revenue mix from SMB. Now, having said that, there is really nothing unusual or noteworthy to call out in the relative Q1 performance between those two customer segments. In relation to the cloud aspect of Q1, the trends we saw in Q4 continued into Q1, and those were also largely consistent with what we expected.

The Cloud business does continue to be impacted by pressure on paid seat expansion and free-to-paid conversions at the top of the funnel. Although we continue to see some signs of stabilization as the rate of deceleration in those areas continue to moderate slightly. The other parts of our Cloud business, migrations, upsell to higher-priced versions, cross-sell, customer churn, those also all continue to be very healthy and perform in line with our expectations. And then, from a linearity perspective, linearity in the quarter is what you'd expect to see, and the trends and impacts were fairly consistent across products, regions, and verticals. Hope that color helps.

Cameron Deatsch (CRO)

Can I also just add on there, at the risk of three people answering one question? One of the tailwinds we've seen is consolidation, and we are actually seeing that across the market. More and more of the conversations I'm having with customers, large and small, are them trying to simplify the number of tools that they are using out there. And because Atlassian is so mission-critical, we are one of the vendors that they turn to, you know, consolidate on. A good example of that was Domino's Pizza that run 4,000 stores across sort of Asia-Pac and across the world, actually. And they've consolidated six tools down to one Jira Service Management installation, and we're seeing that more and more across the customer conversations.

Operator (participant)

Your next question comes from Brent Thill, from Jefferies. Please go ahead.

Brent Thill (Tech Sector Leader of Software/Internet Research)

Thanks, Joe. Just on Karl's question on the overall macro. In terms of linearity, was there anything different that you saw throughout the quarter, or was that also pretty consistent to your comments about what you've seen the last few quarters between us and the enterprise? And also, if you could just add on, many are asking about close to $1 billion for Loom. Kind of what was the magic sauce, if you will, that drove that type of price point and the desire to complete that transaction? Thanks.

Joe Binz (CFO)

Thanks, Brent. I'll address the first part of your question regarding linearity in the quarter, and then Mike will pick it up on the Loom, the Loom question. Linearity in the quarter was exactly what you'd expect to see. So there was nothing unusual or strange about Q1, from a linearity perspective overall. Mike?

Mike Cannon-Brookes (Co-CEO and Co-Founder)

Sure, Joe, I can handle that. Hi, everyone. Look, from a financial point of view, we think Loom is a great acquisition for Atlassian. The strategic rationale always comes first for us in this particular case. It is a product that's leaning into a lot of trends that we think are working really well, from the point of view of, firstly, distributed work and the increasing desire for asynchronous collaboration, across lots of different businesses.

Secondly, just the shift in the way that people are sharing and consuming video in the enterprise, specifically as the younger generation become more a part of the workforce. And thirdly, AI is changing the way that video can be created and consumed in really interesting ways that I think it will make it more a part of the formats that we all collaborate on and work over time. From a financial rationale, look, the business itself and the product of Loom is gonna continue as a standalone individual product as we've said. As Scott mentioned in his remarks, you know, over 200,000 customers now.

It's got a fantastic brand, and it's the leader in that space, and is a fast-growing standalone business in and of itself. Secondly, we believe for ourselves, there's obviously a lot of opportunities in video and combining our video infrastructure team with Loom's video infrastructure team. We have video as a first-class citizen across our platform family of products today, but obviously, the Loom capabilities will improve that in each of our spaces, whether that's in service management or in broad business collaboration or of course, in software teams.

And lastly, there's obviously an opportunity for us to combine products, as you've seen us do a little bit already with Atlassian Together, to cross-sell Loom as a product into our existing base of more than 265,000 customers. So, we think it is, it's a fantastic deal. We're super excited about the product. We've been customers of it for a long time, and I really think it can do great things as part of the Atlassian family.

Operator (participant)

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

Kash Rangan (Managing Director)

Hi, thank you very much. Nice to see the stability in your end markets. I was curious to see what do you think about the Data Center growth rate at 42%? It seems to be outpacing the Cloud. Probably should be flipped the other way. I'm sure you would like that, and we would like that too. Any refined thoughts on how you view the Data Center business growth profile and the things you might be doing incrementally in terms of functionality for the Cloud product that would make it more of a compelling value proposition for the customer to go Cloud as opposed to Server product? Thank you so much, and that's it.

Joe Binz (CFO)

Yeah, Kash, this is Joe. I'll start. You're right, it was another strong quarter for Data Center at 42% growth. That was slightly ahead of our expectations, and it was driven by really strong renewals, migrations from Server, and seat expansion within existing customers. It's worth noting we're growing a significant installed base on Data Center, which is a great stepping stone to the Cloud for those who are currently blocked from moving to the Cloud at the moment. It's a good sign of how committed customers are to the Atlassian roadmap and platform, and having a big installed base on Data Center is a high-class problem to have, because that will fuel future migrations to the Cloud. Cameron?

Cameron Deatsch (CRO)

Yeah, I've had dozens of conversations with many of our largest customers about this exact decision that many of them are making. The reality is we see having both cloud and Data Center as a long-term competitive advantage for Atlassian, and we're providing optionality for these customers in the coming years. As far as the functionality perspective, the good part is there is very few customers where we have not been able to handle their scale, their data requirements, their privacy requirements, their compliance requirements, or their needs for customizations in cloud. So rarely is there a technical conversation where customers can't go to cloud. It's really just, are they ready? Can we move the migration? Where are they at in their business, and is there the compelling functionality to move them over?

In every one of those conversations, the customers understand Cloud is in their future. It just comes down to the timing to get them over. But either way, an investment in Data Center, investment in Cloud is a longer-term strategic investment in Atlassian. It gets them further committed to Atlassian, and I know, and we've shown with our track record that we can and will move Data Center customers to the Cloud, along with their business needs.

Operator (participant)

Your next question comes from Fred Havemeyer from Macquarie. Please go ahead.

Fred Havemeyer (Head of US AI and Software Research)

Hey, thank you. Good to be catching up on this call. I wanted to focus in on how you're thinking about AI overall as an overarching strategy, and I can't fail but notice, of course, that your new Chief Marketing Officer has a PhD in machine learning. A number of your product offerings you're describing, of course, including Loom, being able to integrate generative AI-related summaries. Just it seems like there's an overarching theme here. Of course, you spoke to a part of it, but from top to bottom, it seems like you're trying to become more of like an AI-focused company as well. So perhaps, you know, could you elaborate on that and just how you think of the ongoing Atlassian branding and what value might be unlocked from perhaps being more of an AI-first company? Thank you.

Mike Cannon-Brookes (Co-CEO and Co-Founder)

Thanks, Fred.

I look, I can take that first, and then Scott can follow on. Yes, certainly, great observation. I'm not sure if you or, or ChatGPT observed that, but, Zeynep does have a Ph.D. in machine learning. She's also our CMO and fantastic. That, that'll obviously be a, an addition to her, her capabilities in, in AI marketing, but obviously not the, the singular reason, for bringing her on board. Look, I, I think AI, we couldn't be more excited by AI and large language models at, at Atlassian, right? We, we take the view that it's a huge opportunity for us, for a number of different reasons.

I think in each of our markets, this technology transformation will be a huge change in the ability to deliver value to customers, which is where great software businesses are built. We have a lot of very valuable data from our customers that we are the custodians of, and a lot of that data is textual. And increasingly, video and audio are effectively becoming text with AI. So we have a lot of their data, which is really important in AI, to be able to give them fantastic answers or magical experiences. Secondly, we have a fantastic platform that we spent a lot of time building. So you see that in Atlassian Intelligence features that we've already shipped.

Our ability to ship those features to all the products in the family simultaneously is a result of near on a decade of building a cloud platform, having the customer's data centralized, having singular editor and UI surfaces. So our ability to get features out to customers, we're incredibly, incredibly bullish on beyond just our ability to build them. And thirdly, obviously, with our world-class engineering team and our R&D capabilities, this is a technology transformation, and so you need to fundamentally build new products or build additions to existing products, or build features, or change the way features are built. That takes a lot of internal R&D and expertise, and we have that in spades. So we feel incredibly excited about what AI can do for our customers fundamentally, and what value we can deliver.

Look, we're in the business of making amazing products and delivering them to our customers. It's like someone's given us a whole new, you know, painting set to paint with, a whole new set of materials that we can, we can create art with, and so we're, we're extremely excited. We are certainly placing that at the center of our philosophies on building products. I think that's what software companies are doing. I, I'm not sure when people say AI first company, exactly what that means, but we are certainly heavily investing in, our AI capabilities, all of the, the governance and privacy, and responsible technology principles that are required to do that, well for customers and give them the right data provenance when we give them answers of any form.

But also making sure that we deliver those capabilities and that we are investing in how we can do that. And this is gonna take a few years to play out, but we're certainly really, really excited. Scott, anything you'd add onto that?

Scott Farquhar (Co-CEO and Co-Founder)

Yeah, just a couple of things. Look, we all know that AI is driven by unique data sets, and you can provide unique experiences when you have unique data sets. And if you look at what Atlassian has done over the decades, we've been in business and the data we have, it's a really unique advantage for us. Firstly, our products are open by default, which sounds like a simple thing, but if you want to train AI on data inside your organization, that data can't be isolated to a few people. And if you use Confluence, you as one of our customers, you have a decades worth of data that's available to train their AI on and help them make decisions. That's a really big part of our advantage.

The second one is that, we have breadth across what we do, in terms of the workloads and what people use our products for, span the entire organization. And, that allows us to, you know, do very, you know, unique data sets to make, decisions across the entire organization. And lastly, that also includes third-party products. We've talked about our open tool chain for a long time, and, if you're a single vendor, that just does one thing, you can provide information about that one thing. But because our open tool chain spans everything across an organization, we can provide, experiences and, you know, AI insights that span your entire organization. And, so I think those, those are all really interesting.

And then, you know, while other vendors waffle on a little bit about their AI features, you know, we're out there delivering them on our platform, and we're super excited about what we deliver on a regular basis. And we've just got a cadence of those things coming out to our customers on a regular basis. And so we're heads down delivering the value to our customers.

Operator (participant)

Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead.

Gregg Moskowitz (Managing Director and Senior Enterprise Software Analyst)

Hey, thank you for taking the question. I had a follow-up on cloud migrations. You mentioned in the shareholder letter that the number of user migrations over the past year has risen by nearly 50%, and certainly that's a high growth rate, but I think the increase was more like 2x a couple of quarters ago. So I'm wondering, you know, is this change in growth just a function of law of large numbers and tougher compares, or is it also reflective of a much smaller opportunity set, or even a slowdown in the appetite of customers to to migrate to the cloud? Thanks.

Cameron Deatsch (CRO)

Yeah, this is Cameron. I'll take first off this and let Joe add anything he deems fit. Yeah, the reality is, we've had. Ever since we announced the Server end of life, which was a little more than three years ago now, we have increasingly, quarter-over-quarter, raised our number of migrated seats that come across the board. But of course, we saw some huge jumps, depending on different times along that journey we've had, based off of either our loyalty discount programs or price changes along the way. As you remember, over the last few years, we've built in these compelling events to give customers reasons to migrate throughout the years, and the customers that migrated earlier were financially incentivized to do so.

That said, the numbers that we are dealing with now are quite large, and they continue to grow significantly quarter-over-quarter. I believe as we go into the next few months with Server end of life, many of the customers who've waited till the last moment will be making these decisions to get the Data Center and Cloud, and there will be a lot of energy around that. The good part is all of our customer-facing teams, our partners, our migration experts, you name it, are more than capable of handling any influx we get in the next few months as customers wait till the last minute, to make their choice on whether to go to Data Center or Cloud.

As I've already mentioned, post-February, we will continue to have migrations, continue to be a large part of our business as we move Data Center customers to Cloud in the coming years. Joe?

Joe Binz (CFO)

Yeah, Cam, the only other thing I'd add, Gregg, is, you know, we do expect FY 2024 to be a very big year for cloud migrations. You know, we've guided to 10 points of cloud revenue growth coming from migrations for the full year. Just to reiterate what Cam said, that's really driven by two factors. We do continue to invest and make terrific progress in enabling and unblocking more and more customers to the cloud. Our tooling, our support, our cloud capabilities get better every day. And then the second point, to reiterate what Cam said, is we do have the Server end-of-support moment in February 2024, and that will also contribute to migrations growth.

Gregg Moskowitz (Managing Director and Senior Enterprise Software Analyst)

Great. Thank you.

Operator (participant)

Your next question comes from Michael Turrin from Wells Fargo. Please go ahead.

Michael Turrin (Senior Technology Analyst)

Hey, great. Thanks. Good afternoon, I appreciate you taking the question. Joe, maybe one on margin. You raised the margin outlook fairly meaningfully. The 20% implied is now close to where you ended last year. Can you just help level set where you are from an investment perspective? How much opportunity do you see on, on the cost management side, and if there are priority areas for us to be focused on as the Server migration end approaches, and maybe some resources free up as a result, that's, that's also useful. Thank you.

Joe Binz (CFO)

Thanks, Michael. You're right. The stronger-than-expected operating margin performance in Q1 and our guide in Q2 was driven by greater operating leverage. And so we are seeing that primarily on the operating expense side. In terms of operating expenses, I would say it's been a team-wide effort focused on a few core principles. We're focused on maximizing the return on every dollar we spend, making disciplined prioritization and resource allocation calls, and driving operational efficiencies as we gain scale. As a result, the savings are really broad-based across all groups, from developer productivity and cloud COGS optimization to G&A and everything in between. So it's happening across all teams, and we've made good progress to date.

I do think it's important to note, while we do this, we continue to make the disciplined strategic investments in areas like cloud migrations and enterprise and AI, in our core markets, to drive durable long-term growth and serve customers. In terms of the long-term trends, you're absolutely right. We've made significant multi-year investments in building out our cloud platform and building out our enterprise-grade capabilities. We do expect that those growth rates and those investments to moderate, as we make tremendous progress against that over the next year or two. So that's definitely an additional area of leverage that we should see in the model, over the coming two years.

Operator (participant)

Your next question comes from Peter Weed from Bernstein. Please go ahead.

Peter Weed (Senior Analyst of SMID-Cap Software and Cybersecurity)

Thank you. In your note, you know, I think you did a great job of mentioning, you know, the strength on premium and enterprise edition upsells, but I didn't notice any conversation about cross-sells, you know, new functionality and to things like JSM that have been, you know, such a powerful growth engine recently. How has cross-sells been progressing? Any change in propensity to adopt new product or you know, I think, you know, from some other companies, we're hearing some end-of-year strength with strong pipeline. You know, do you see some increasing interest here and optimism for strength at the end of the calendar year, or how are things going with kind of cross-sell, particularly JSM, I would say?

Joe Binz (CFO)

Yeah, thanks. I'll take the first part of that question, and then Scott will chime in. Cross-sell is absolutely a key driver in our cloud revenue growth rate model. We see a lot of opportunity to cross-sell additional products into existing customers. That continues to be very healthy. I talked earlier about the fact that that's been one of the areas of our cloud business that has held up really well and been resilient through the macroeconomic environment that we've experienced. In terms of pipeline, I would just say, in general, our Q2 pipeline is very strong, and that's a function of everything that we've talked about that's held up well to date. It's the migrations, it's the cross-sell, it's the ability to upsell our customers to premium and enterprise editions of our products.

We're excited about that, and we're looking forward to a great Q2. Scott?

Cameron Deatsch (CRO)

I'll take that for you, Scott. This is Cameron. Yeah, I want to reiterate the pipeline. The strength we see in enterprise today on our healthy pipelines is not just migrations, but it also includes Jira Service Management. We continue to see Jira Service Management's expansion within our customer base. Well, nearly 50,000 customers are on Jira Service Management today across all sizes. You know, whether that's small customers, as well as we're increasingly seeing some large wins in larger enterprise customers with competitive replacements of legacy tooling. I believe this is only gonna continue to be strong as we continue delivering new innovations like we spoke about earlier today with the virtual agents and our mergers and acquisitions to continue to innovate in the ITSM space. So that is a major focus for us.

I also do want to highlight that many of our customers, actually, one of the most exciting things about talking about customers, about getting to migrate them over in enterprise, is a lot of the new capabilities we've been launched in our existing products, whether that's whiteboarding and Confluence, new automation capabilities, analytics capabilities, but we've also launched new products this year. Jira Product Discovery is getting a lot of attention within our customer base, and we've seen that, getting rapid adoption, within kind of the early adopters in our customer base. So very excited about that. And just over the last couple of weeks, we launched a new product called Compass, focused on, really our core developer user base and really have a new, innovative experience to help, developers manage their complex services, platforms.

So I'm very excited across the board, the strength in Jira Service Management, but, one, we can't lose sight of the many other products that many of our customers are very excited about. The reality is, it's just way easier for them to adopt those products. They can simply just turn them on, add them to their environment, and get value out of them. So by the time we come around and have a sales conversation, many of them are already understanding the value that these products are providing to them.

Operator (participant)

Your next question comes from Ari Terjanian from Cleveland Research. Please go ahead.

Ari Terjanian (Partner and Senior Research Analyst of Cloud and Software)

Yes, hello. Thank you for taking the question. We noticed some, you know, incremental carrots, so to speak, during the quarter around, you know, dual licensing, step-up credits, six-month free trial for Cloud. Could you speak to some of those efforts and, you know, if they're providing any lift or also maybe potential, you know, dilutive impact on, on the revenue? Thank you.

Cameron Deatsch (CRO)

Yeah, this is Cameron again. I'll speak broadly just to everything we've done to incentivize customers to migrate in the past few years. And it's a, as I continue to say, is when we announced the Server end of life three years ago, we had a carefully engineered set of programs to incentivize customers to migrate to the Cloud, sooner than later. This was a combination of pricing incentives with loyalty discounts, extended trials, so that customers could, you know, start using Cloud, at no cost and get used to it and understand and comfortable with the new functionality. Or, of course, when customers purchase Cloud to ensure that they can continue to run their on-premise environments, their on-premises environments like Data Center, during the migration experience, knowing that migrations take different, extended periods of time. So we've had to ride.

All of these were well-planned, engineered from day one, and have been part of our migrations forecasts for the last few years. So, we continue to roll those out, all the way up to the Server end of life in February. The goal really being to make it as easy as possible for customers who want to get to Cloud, to get to Cloud as quickly as possible.

Operator (participant)

Your next question comes from Jake Roberge, from William Blair. Please go ahead.

Jake Roberge (Equity Research Analyst of Software)

In your work and work management. And do you ever see that, the potential to combine that with Atlassian Together? Seems like you're planning to offer it as a standalone product off the bat, but could Loom get integrated into that suite over time?

Mike Cannon-Brookes (Co-CEO and Co-Founder)

Yeah. Good day, Jake. I think I missed the start of the question, so tell me if I'm answering the wrong question here. I think the first half didn't come through. The question as I interpreted is: Could Loom get integrated into some sort of a work management suite or bundle over time, like we've done with Jira Work Management, Confluence, and Atlas and Atlassian Together? So I hope I'm answering the right question. That certainly is a distinct possibility. As I mentioned, there's a number of ways that we're looking to continue to monetize and grow Loom as a result of the acquisition. One of those is certainly just Loom by itself as a standalone product. It has a significant audience already.

It has some really good viral properties and growth vectors to it, and we think we can help continue that movement forward. Second, certainly monetizing video across our audiences, and improving, you know, you might think about it as a competitive position of Confluence and better video features, right? But thirdly, is certainly looking at different bundles and opportunities in our customer base. I think you can be sure that we will do that thoughtfully when we come to looking at work management or ITSM. Don't forget, there's a significant video component in knowledge bases and helping employees too, and potential to share quick things, either from the customer to the agent or from the agent back to the customer.

We'll continue to look at possibilities of bundling and putting it into things like Atlassian Together, yes. But our upfront goal will be to focus on integration and firstly, continuing the great growth rate of Loom as a standalone product, which is a fantastic business.

Operator (participant)

Your next question comes from Keith Bachman from BMO. Please go ahead.

Keith Bachman (Senior Research Analyst)

Hi, many thanks for the question. Cameron, I think this is for you, if I could. When you talk about the conversion uplift to the Cloud of 10 points, I was wondering if you could offer some commentary around what is that same metric, you know, how much uplift is going to Data Center? And then for each of those, what happens after February 15th? Any kind of guidepost on how we should be thinking about the conversion uplift for the customers that may be ongoing past the February 15th deadline? Any kind of commentary on how much conversion uplift post February 15th? Many thanks.

Cameron Deatsch (CRO)

Okay. Yeah, so one quick part of clarity. So the 10 points of growth we mentioned is for our Cloud business. That's just when it came to the migrations and being clarity on, on where that growth is coming. So, and of course, as Jill already mentioned, a large portion of the Data Center growth today is simply Server to Data Center conversions. All of that pricing is actually available on our website. You can see across all tiers, you can see what existing Server renewals are and what the existing Data Center list prices are, going forward. Now that the once customers have gone to Data Center-

Keith Bachman (Senior Research Analyst)

Sorry, Cameron, that wasn't my question. My question is, how much—it, what's the same metric for Data Center? So of the growth, how much contribution are you getting from conversions?

Cameron Deatsch (CRO)

Joe, you wanna address that?

Joe Binz (CFO)

Yeah, it's about 15 points-20 points.

Keith Bachman (Senior Research Analyst)

And then what happens to those two metrics after the end-of-life of Server, do you think? And any kind of just directional barometers you would want to provide?

Joe Binz (CFO)

I would say in general, what you should expect post-Server end of support is, you know, obviously, the Server-to-Data Center migrations will start to decline. That's, that's gonna be a big driver of why we expect to see the deceleration in Data Center in the second half of the year. We haven't quantified specifically what that, that curve looks like. A lot of it will depend on what the customer purchasing behavior is around, that Server end-of-support moment. How many of those seats move to Data Center, how many of those seats move to cloud, and the timing on that.

Operator (participant)

Your next question comes from Fatima Boolani from Citi. Please go ahead.

Fatima Boolani (Head US Software Equity Research and Managing Director)

Hi, good afternoon, thank you for taking my questions. I wanted to talk about the cloud SKUs, and the pricing increases that you've undertaken in the cloud suite of products and solutions. And in addition, you know, it seems that every October, like clockwork, pricing goes up by 5%. So, Joe, maybe the question is for you, how is that being contemplated in your guidance for the year? And as an added layer, can you speak to customers who migrated to cloud, in the past, in the recent past, who are perhaps on loyalty discounts, and what that cadence of, you know, getting these customers on loyalty discounts up to, you know, MSRP, if you will, you know, how that's being considered in your cloud guidance? And then a quick follow-up, if I may, please.

Cameron Deatsch (CRO)

Yep. This is Cameron. Let me just address pricing directly on cloud. As you mentioned, we did have cloud price increases go out this October, very much in line with the previous cloud price increases that we've rolled out in October. As you mentioned, for our customer base, this is largely. Granted, no customers like price increases, but it is, from all those purposes, a non-event. Customers understand that these are a regular price increase that comes from Atlassian and regularly relatively minimal at the, roughly, as you mentioned, 5% rate, going forward. Of course, we have many customers. Our primary goal here is to continue to migrate many of our existing on-premises customers over to cloud.

So it's always allowed us to, you know, we've always been very considerate about what that pricing dynamic is on our cloud list prices compared to on-premises customers. As you already mentioned as well, as part of the last few years, we offered loyalty discounts, which are basically discounts off of list price for cloud over the last few years. And customers are on, many of our customers are on one-year or two-year contracts in cloud. When those contracts come up for renewal, they will be coming up at, at list price, whatever list price is at that time.

The good news, all those customers understand that dynamic, when we speak to them about the loyalty discounts and these programs, and more importantly, since most of them are on, you know, are on annual or, you know, two-year contracts, they have plenty of time to plan accordingly, for what their renewal will be.

Joe Binz (CFO)

And then thanks, Cam. The question in terms of the guidance, as Cam mentioned, the effective price increase is roughly 5% blended. That's a good rule of thumb to use as you think about the impact, that is built into the guidance. And do keep in mind, whenever we make these price changes, it takes a while for it to layer into the model simply because they're effective when the agreements are signed, and that happens over the course of time as for our annual and multi-year agreements.

Operator (participant)

Your next question comes from Derrick Wood, from Cowen. Please go ahead.

Derrick Wood (Managing Director)

Oh, great. Thanks for taking my question. In the shareholder letter, you guys mentioned that cloud sales from your channel was up nearly 2x year-over-year. And when I look at your total cloud growth of 27%, that suggests that your partners are really generating a tremendous amount of your cloud growth, and perhaps your own channels are a bit softer. Has there been a shift in go-to-market strategy to call out that's causing a higher mix of growth coming from your channel partners?

Cameron Deatsch (CRO)

Yeah, I'll take that one. This is Cameron. So first off, we see that as very, very good news. As all of you know, Atlassian's channel, our solution partner network, is a critical part of our overall go-to-market, and has been for all 11 years I've been here, and even longer than that. The dynamic you're seeing with the partners' cloud growth in the recent months largely comes down tied with our enterprise business. We have many of our enterprise customers have large enterprise migration needs. All of them, usually, when they take on a large migration, are looking for some sort of technical or consulting help. And that's where our solution partners can provide direct access, plenty of expertise, and honestly, de-risk the migration when it happens.

So we have very much tied much of our enterprise go-to-market, not just with our direct sales, but joint sales with our solution partners to make those migrations happen, and that's why you're seeing the outperformance in our channel cloud sales over the last couple of years. I also want to add, not just the channel, it's the reality is we've unlocked a ton of new capability in cloud, as well as unblocked many customers because of the scale, data privacy, and compliance capabilities that we've released in the last few years, which only opens up our channel partners and the biggest customers that they are serving continue to open up those doors to have them sign up for new migrations contracts.

Derrick Wood (Managing Director)

Makes sense. Thank you.

Operator (participant)

Your next question comes from Mark Cash from Raymond James. Please go ahead.

Mark Cash (Associate Analyst of Equity Research)

Thanks for taking the question. This is Mark on for Adam. Wanted to circle back to the consolidation trend and Atlassian Together. We're now a couple quarters after announcing the offering. So could you first comment on the adoption, if it's helping drive cloud adoption, and if the plan of seeing organizations expand seats across buying centers is actually playing out so far? Thank you.

Scott Farquhar (Co-CEO and Co-Founder)

This is Scott here, I think-

Joe Binz (CFO)

Sorry, Scott, go ahead.

Cameron Deatsch (CRO)

Okay. Yeah, this is Cameron here. Apologies for the confusion there. Yeah, listen, Atlassian Together is a key strategy to address what we see out there in the market of a variety of project management tools, and used by different departments and different teams across the board. Many, many of our customers, many of them are looking to try and standardize, you know, and consolidate on a single vendor to manage their teamwork needs.

And when we looked out to the competitive offerings and what our customers are looking for, we realized we had a massive advantage with the broad suite of Atlassian products, not just Jira Work Management, including Confluence, new products like Atlas, to allow for customers to have a broad set of use cases supported by a variety of tools versus having from a single vendor at a significantly lower cost. So we come out, and many of those customers over the last year have made those decisions, and are very happy migrating off of the other federated sets of tools to the Atlassian work management set of solutions. Now that said, we are still, as you mentioned, a few quarters into this.

It's still relatively early days in that offering, but we're definitely resonating with the overall demand for consolidating on teamwork tools and platforms, and going with Atlassian has been a massive advantage there.

Operator (participant)

Your next question comes from Keith Weiss from Morgan Stanley. Please go ahead.

Keith Weiss (Managing Director)

Excellent. Thank you guys for taking the question. I wanted to squeeze in two, if I can, on different topics. One on just overall customer count. It seems like another relatively smaller than what you've seen historically customer add quarter. Can you talk a little bit about kind of the trends that you're seeing with customer accounts and maybe the free to paid migration? But also, you, you took away the disclosure of actually, like, a point number of the number of customers. Just Atlassian's been a, like, a price times quantity of, like, you, you add a lot of customers, and then you make those customers bigger over time. Just wondering about, like, why to take away that disclosure. You're only halfway to your 500,000 customer goal.

Why, why, why not give the specificity on a go-forward basis?

Cameron Deatsch (CRO)

So this is Cameron. I'll address the first half of that and then hand off to Joe. So, as you mentioned, as we saw over the last year or so, we saw the new customer number declining, largely as we saw free-to-paid conversion rates slow down. Now that said, we still continue to get plenty of customers coming in to our website. Many are signing up for free instances and are using free versions of our products, and that only continues to grow year on year. But we just saw them being slower to get out their credit card or hit their 11-user mark to get into paid, into that paid cohort. Good news, as Joe had already mentioned earlier, we are starting to see stabilization in that, overall impact.

Actually, we saw increase from Q4 to Q1 in that net new customer number, largely due to improvements that we have made in our funnel, specifically around the commerce and conversion experience. Just simply making it easier for these free customers to purchase our cloud products. Now, that said, there's still plenty of uncertainty out there in the market, but seeing that stabilization and slight improvement quarter-over-quarter, we see as largely positive in Q1. Joe, do you wanna speak more to the numbers themselves?

Joe Binz (CFO)

Yeah. Thanks, Cam. Keith, we will continue to provide the total customer number on a directional basis, so that will continue to be provided. We are also adding a new KPI that really goes to our strategy, and we believe this will help investors track progress against that strategy. We are increasingly focused on moving customers, existing customers to the cloud and driving expansion within that massive base. And as we pointed out in the shareholder letter, this goes hand in hand with our strategy of driving breadth and that total customer number. So we are introducing an additional customer KPI for investors that we will report on a regular basis and to track our progress against this, and that's specifically the number of customers with over $10,000 in cloud ARR.

At the end of Q1, as you read in the shareholder letter, we had over 40,000 customers that met that profile, growing 18%. And the reason we think this is a valuable metric is because this represents over 75% of our cloud revenue. So giving investors both the breadth and the secondary metric around shift to cloud and expansion, we think, gives them a great picture holistically of our strategy and our execution against it.

Operator (participant)

Your next question comes from Michael Turits from KeyBanc. Please go ahead.

Michael Turits (Managing Director of Software Investment Banking in KBCM Technology Group)

Hey, guys. Maybe we can talk about JSM a little bit. One of the things that I thought was interesting.

At Team '23 was that movement to templates as a way of taking JSM beyond just the IT department into other areas of enterprise. Perhaps you can talk a little bit about the success there and how much non-IT take rate you're starting to get with JSM.

Scott Farquhar (Co-CEO and Co-Founder)

This is Scott here. That's something we're very excited by, is the fact that we get really excited thinking about how help happens across an organization. You know, it's typically a frustrating experience for, you know, so no matter where you sit in an organization, getting help from another team can be quite a frustrating experience. It's often mediated in Slack or emails, and you have to search for that information to actually get something done. And while we see IT, you know, teams being sort of the forefront of making that a better experience, the more forward of our customers are saying: "Well, why is that not the case also for our legal department to get a contract reviewed?

Why is that not the case when I want something from my HR department?" And so as a result of that and, you know, us building the features there, as you mentioned with templates, 60% of our JSM customers now use JSM outside of IT. And I think you can see more and more of that. We're particularly excited because at our price point and with our usability, I think we have a better opportunity than many other vendors in this space to go beyond the traditional IT help desk. And so, yeah, we're really excited about that, and I'm glad you've recognized it.

Operator (participant)

The next question comes from Ittai Kidron from Oppenheimer. Please go ahead.

Ittai Kidron (Managing Director)

Thanks. A couple of questions for me. First, can you give us an update on work management and your progress there in the field? And whether that part of the business is affected more by slower free-to-paid conversions. And the second question relates to the migration. It seemed like as part of your prepared remarks, you suggested, maybe I got this wrong, that you expect some customers not to migrate. Can you give a little bit more color on that? Have you already heard from customers that they intend to not migrate at all, and just move elsewhere or live without support? If you can give us more color on the magnitude of that cohort will be greatly appreciated. Thanks.

Cameron Deatsch (CRO)

Yeah, this is Cameron. I'll speak to the work management side of this and slightly to the migrations piece, then hand off to Joe. So, yeah, listen, work management is a key part of our overall offerings. And just remember, the products that we, you know, put in there are Confluence, our second-largest product, and it has massive adoption across our customer base and massive usage, and has been a key part of our SMB as well as our enterprise business. And many of the new functionalities we drive in Confluence, whether that's the whiteboarding capabilities, automation capabilities, you name it, have been key compelling drivers for migrations themselves.

Add in our other offerings, like Jira Work Management, which allows for much simpler business-friendly projects tied to your Jira usage, is a great way to extend from those technical development and IT teams into these other business use cases and projects. And we've seen, significant adoption of those Jira Work Management project templates. We have a new product called Atlas, allowing you to basically communicate the status and updates and who's working on projects, and the status of those projects, and the goals and OKRs associated with them, regardless of where the work is happening. And as we already mentioned, Atlassian Together, bringing all those products together in a single offering at a competitive price, allowing customers who are looking to consolidate their work management tools onto a single platform for Atlassian.

So absolutely a critical part of our go-to-market going forward, and part of our overall financial picture over the last year. As far as the migrations themselves, the Server customers, there is a significant portion of Server customers who have yet to decide to move to Data Center or Cloud. And we are working with every single one of them. I'll tell you right now, is definitely aware of this February date. And we will hopefully ensure that we guide them to either a Cloud or Data Center decision post-February. As far as going to alternatives or so on, really, we haven't had many of those conversations or see any spike. The migrations process has been very much in line with our plans, and continues to be month-on-month.

Joe, Mike, you have anything to add?

Joe Binz (CFO)

Yeah, thanks, Cam. In terms of the question on guidance, you know, there is, as Cam mentioned, a Server cohort that will not migrate to Data Center or Server in FY 2024, and we factored that into our guidance. We based that on an analysis of our Server customer base, the trends we're seeing, the customer profile, the surveys that Cam mentioned. So we have accounted for that. We have a prudent assumption to account for that, and that is in the guidance itself.

Scott Farquhar (Co-CEO and Co-Founder)

If I can just add one or two more points on work management, Ittai. Firstly, I think we continue to see value in being quite unique in the market in bridging technical and non-technical teams across the work management space. It's important to note that our three markets don't exist in isolation. They each have unique sales motions and unique target personas, but they are intimately connected in a lot of different ways. For example, you might have marketing teams in Trello that need to connect to engineering teams and operations teams that live in Jira Software, for example. That uniqueness is a really good differentiator for us at the moment in the market.

Secondly, with things like Atlassian Together, as we mentioned earlier in the call, you know, consolidation on those spaces is a big part of things, and you're seeing that with execution so far, but also with the Loom and with the other things that we are delivering and adding into that space. Again, Loom will sit in the work management area, as far as Atlassian is concerned. So, just wanted to be clear that we're, you know, pretty steadfast in our commitment to work management. We think it's a huge opportunity for us, and we're not waffling around at all.

Operator (participant)

Your next question comes from D.J. Hynes from Canaccord Genuity. Please go ahead.

Luke Morison (VP of Equity Research)

Hey, this is Luke on for D.J. Thanks for taking the question. So I'm gonna dovetail off of the other questions around migrations after end of life. I'm wondering if you can comment, just sort of how much flexibility do customers have to extend beyond that deadline? You know, how difficult is it for them to continue using those products once they're no longer supported? And then how long could it take for those remaining migrations to actually play out?

Cameron Deatsch (CRO)

This is Cameron here. A couple different dynamics to that question, but first off, will we extend support to Server customers post the Server end of life? And the answer there is no. Those customers, we gave those customers basically three and a half years heads up to make this decision, and we're definitely holding by that. That said, if a Server customer comes by, just so you know, the Server licenses are perpetual licenses, so their software will continue to work. They just simply will not be able to get maintenance, patch updates, new functionality, or any support from Atlassian support teams. So they will continue to function just fine. But once again, those customers eventually are gonna want to have new capabilities or have something that they need support from, and they'll call us up.

Now, if a customer does call us up a few months after the Server end of life, they're on a Server unsupported license and need help moving to the cloud, we absolutely will help them move to the cloud as long as they decide to purchase a cloud license. And with there, we're happy to have the technical conversation with them to help them move their Server licenses up to cloud and whatever technical, you know, discussion is required. But that is the only place where we will, you know, to engage those Server customers, is if they have decided to purchase cloud itself.

Scott Farquhar (Co-CEO and Co-Founder)

Can I add on to that? Stepping back at the macro level, we've had a couple of years now where we've been focused on, you know, migrating our customers with a compelling event of Server end of life. But you know, at a macro level, half of the migrations we're getting are from Data Center, and so that spigot, like, doesn't turn off come February next year. Like, that's gonna continue to be there. And we're continuing to invest in migrating customers across and continue to invest in making our Cloud platform better and better. That's both attracting new customers to Cloud and, of course, continuing the migrations from Data Center.

So these are investments that like, over time will plateau and, you know, we'll start getting our peak, you know, migrations investments will at some stage, you know, start decreasing. And we also stage where more and more of our customers are in the cloud, and if you think about the innovation that we can bring in cloud because of the platform we've got there, that's what I get really excited by.

Our ability to bring new products to market is way, way, way faster in the cloud, and you've seen that with Jira Product Discovery, we've seen that with Atlas, with Compass, you know, with Jira Work Management, you know, which is easy for us to get our customers to migrate from Jira Software and, you know, get that N plus one user in the HR department or in the marketing department to start using Jira Work Management to track their work. It's easy to put Jira Service Management into these customers and cross-sell there. So the ability for us to both build new innovation in the cloud is way higher, particularly because we built this cloud platform that we've talked about and you've seen.

You know, the reason we could bring AI to all of our customers and all of our products so quickly is the investments we've made in this cloud platform. You know, as we hit peak migrations, we'll be able to put more and more effort behind building new things in this platform. Of course, acquisitions work really well as well. You know, the fact that we've got these customers in cloud, it's way easier to introduce them to Loom than it is for a behind the firewall customer out there. I'm super excited. You know, I know we've focused a lot on migrations historically, and I know it's really important and you know, drives a lot of kind of people's spreadsheets about how they think about the business.

But the more customers we have in Cloud, the more innovation we can deliver, the better we can cross-sell our customers, the easier it is for us to get more incremental users inside our, you know, customer, inside our products than go wall to wall. And so I'm really excited, like, the more I look around the opportunities we have, and particularly in this moment when customers are coming to us for consolidation and they're, you know, talking to us and saying, "Hey, I wanna get rid of plenty of other vendors out there because you're mission-critical, and you do things that no one else can, and you've got Atlassian Analytics that allows me to see how work moves across my entire organization." They're great conversations to have.

You know, migrations are great, but the real benefits are gonna come on the far side of those migrations, and I just think that's worthwhile pointing out.

Operator (participant)

Thank you. That's all the questions we have time for today. I will now turn the call over to Mike for closing remarks.

Mike Cannon-Brookes (Co-CEO and Co-Founder)

Yeah, look, thanks, everyone, for joining the call today. As always, appreciate your thoughtful questions and continued support. It'd be a bit remiss of me not to thank Cameron for his 11 years of amazing dedicated support, friendship, and everything else, ending as our Chief Revenue Officer adroitly over the last few years. So, just from me and from all of the team, thank you to Cameron before he heads off to his rocking chair on his porch in retirement, and we hope he really enjoys that. Secondly, on the heels of our High Velocity event, that Scott talked eloquently about earlier, we have Unleash, which is our Agile and DevOps market event, next month in Amsterdam.

And we'll be hosting a virtual ESG forum, both of which. Sorry, the virtual ESG forum is later this month, both of which investors are welcome to. Please, we hope to see you there. Beyond that, we hope you have a kick-ass rest of your day. Thank you for being here.