Atlassian Corporation (TEAM) Q2 2023 Earnings Report, Transcript and Summary

Good afternoon. And thank you for joining Atlassian’s Earnings Conference Call for the Second Quarter of Fiscal Year 2023. As a reminder, this conference call is being recorded and will be available for replay from 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.

Welcome to Atlassian’s second fiscal year 2023 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; our 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 second quarter fiscal year 2023. 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. As always, our shareholder letter contains management’s insights and commentary for the quarter. So during the call today, we will have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s belief, assumptions only as of the date such statements we are made and we undertake no obligation to update or revise such statements should they change or cease to be current. Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission from time-to-time, including the section titled Risk Factors in our most recently filed annual quarter 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 IR website. Please keep in mind, we would like to allow as many of you to participate in Q&A as possible. To facilitate that, we will take one question at a time. Please rejoin the queue if you have another question or a follow-up and we will do our best to come back to you later in the session. With that, I will turn the call over to Mike for opening remarks.

Thank you all for joining us today. As you have already read in our shareholder letter, we closed out 2022, proud of everything we have accomplished in yet another unpredictable year. Despite the current macroeconomic environment, the massive opportunities in front of us has not changed. We continue to make great strides towards our long-term goals and we are ready to execute with relentless focus in 2023. We have achieved a ton this quarter, shipping many platform enhancements and product features that deliver incredible value to delight our customers in the cloud, including delivering data residency in Germany, launching automation in Confluence, helping our customers to the cloud with migrations up nearly 2x from the prior year and completing several of our largest migrations to-date and showcasing our unique position in the ITSM market with impressive customer growth, multiple large swap-out stories and recognition as a leader by industry analysts and these are just a handful of examples. We have always prioritized putting our customers first and we are seeing customers increasingly turn to Atlassian as a trust vendor asking how to operate their businesses better. 2023 will be all about helping our customers navigate these challenging times, absorbing the downstream impacts on our business and setting ourselves up for continued long-term success. With that, I look forward to your questions and I will pass the call to the Operator for Q&A.

[Operator Instructions] Your first question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.

Okay. Thank you very much, and good afternoon, everyone. So it sounds like the macro has had no impact on migration activity so far, even though really, you are seeing it in some other areas. You are still expecting migrations to add 10 points of cloud revenue growth this year. But in an environment where customers are clearly tightening their belt, why is it that you think migrations will continue unabated? Is the TCO advantage strong enough to compel customers even though they have to make a financial commitment, is the end of support date having a real impact there as well, any color would be helpful? Thank you.

Hey, Gregg, this is Cameron. I will start off with some details and then I will probably let Mike add some more from what he’s seeing. So, as you already know, more than two years ago, we announced the upcoming end of life of our server products, and ever since then, we have been on this migration journey, helping our on-premises customers move from both server and data center to our cloud offerings. And I have to say that even in the uncertain macroeconomic times, every day that goes by, I am more confident in our ability to not only attract our customers to the cloud, but convince them of the additional ROI savings that going to our cloud, the additional benefits from a feature perspective, from there we have been able to get increasing our ability to get through the contractual, legal and data privacy aspects and move to our customers to the cloud. We made huge strides in actually migrating their data and their users to the cloud and then from there actually onboarding their users so they understand the new experience. This obviously can be an extremely complex exercise. But once again, we are two years into this and every single day goes by, we have been getting better. I also want to recognize that we purposely built an engineered kind of this path over this three-year timeframe, using loyalty discounts, improvements in our products, so it would provide compelling events along the way for our customers to move. And this just further establishes the demand for our migrations and we continue to feel strong about that additional 10% growth that we see coming from migrations going forward. Mike, do you have anything to add?

Yeah. Thanks, Gregg. Look, I just wanted to say, it’s incredibly important in this environment to help our customers through as well and you talked about the TCO of moving to the cloud. I do think in an environment where customers are looking to get efficiency to optimize their spend, there’s increasing recognition that the cloud itself is a great ownership model for them. It’s a cheaper way for them to run and own and operate their software. And secondly, the benefits of the platform that we have built and the integration across our products, especially as they are experimenting and trying new things, allows them to consume more of Atlassian’s products, and at the same time, do so while making their businesses more efficient, which is what our job is to help them become more efficient businesses, especially in these difficult times. So I think we are really well positioned in that way.

Okay. Very helpful. Thank you, guys.

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

Excellent. Thank you guys for taking the question. In the shareholder letter, you talked about more focused investments on a go-forward basis and the operating margin target for the full year comes up by a little bit. But it doesn’t really seem -- it seems like most of that came from sort of a better margin performance in the current quarter versus really changing sort of the investment profile for the second half. So you could talk to us a little bit about kind of where you are moderating investment, is there a potential offset and maybe to be really to the point, why not sort of more moderation considering the environment and work to drive the margin perhaps back to where we saw them historically in the low 20s?

I will start -- yeah. Keith, this is Joe. I will start and then I will pass it off to Scott for additional thoughts. You are right, our overall view of H2 margin has not fundamentally changed from the prior quarter. We expect revenue growth to moderate in H2 driven by macro impacts we saw in Q2. And then in addition, we had some timing impact on the pull forward of OpEx savings into Q2 that won’t repeat in H2 and we will continue to invest and hire against the terrific long-term opportunities we see. So those are the primary factors. You asked about the broader work that we are doing around reprioritization. What I would say there, the work happening there comes in a lot of different flavors and takes a lot of different shapes. Sometimes it’s about stopping something. It could be about sequencing of the events, moving something to a more milestone-based funding model, structurally lowering the investment level based on a strategy adjustment. So as I think about the work we have been doing around focused reprioritization and resource allocation, it’s really included some flavor of all these things to drive the right overall business outcome. And so we will continue to invest against the long-term opportunities, while balancing that and being responsive to the macro environment in managing costs in conjunction with revenue growth. And I will pass it over to, Scott, if he would like to add anything.

At the risk of repeating you, Joe, just a reminder for those that may be new to the Atlassian story. Back in April, we chatted with you, our investors at our Investor Day and we talked about cluster of four growth opportunities that we saw ahead of us is those were around of cloud migrations, our ITSM opportunity to take market share there, better serving enterprise customers and launching and growing new product that we built on the back -- prior investments we have made in the Atlassian platform. And what we have seen, though, is that those four areas are having great returns. We have got incredible momentum in those four areas. And we said about Atlassian in times of good and times of bad that we think about things for the long-term, where we want to invest over the long-term and make the right choices as a business to get the right returns. And so we continue to invest in those four areas, we are regarding from other areas of our portfolio into these great opportunities that we have identified and shared with you, of course, responsive to the current macro environment and our commitments on it targets that we have given out to you.

Excellent. That’s helpful. Thank you, guys.

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

Hi, there. Thank you very much. I wanted to ask in regards to just what you are talking about in terms of product innovation as you are investing during this period. Certainly is notable, the focus on ITSM, could you take a moment perhaps and talk about how you think of product innovation development and just where Atlassian can innovate and drive another leg of growth as we just navigate and think about the other side of this macroeconomic environment?

Yeah. Fred, I can take that one. Look, it may sound like a boring answer to you. I think the way we think about product innovation in the current environment doesn’t change to the way we thought about it a year ago, two years ago or three years ago, right? We have a job to unleash the potential of every team and that’s all about making our customers more efficient at running their businesses. Again, we can’t help them make cars or rockets or drugs or provide financial services, whatever it is our customers are doing, but we can make their team is more efficient and we really try to keep that as a North Star across all of our markets. At the same time, we continue to rebalance our priorities as we hear from customers and as we look at our resourcing. One of our advantages, I would say, is having a large investment in R&D, which is quite unique, is we are able to move those resources around a little bit more fluidly than other companies may be. So we continue to innovate, we have a lot of new products that we have built over the last couple of years and we continue to work with customers in testing, things like Jira product discovery, Encompass and Atlas, and a couple of upcoming ones like is in alpha and beta. Those are examples of ability to ship new things. At the same time, we continue to deepen our platform investment and one of the things as I just mentioned, to Gregg’s question earlier, when customers move to the cloud, their ability to consume multiple Atlassian products via the platform and connect them together with things like Smartlinks or analytics running across them is a huge advantage of the cloud and that all comes from the innovation and investment in our infrastructure and ability to manage all of that sort of thing. At the same time, the innovation doesn’t just come in new product form. So we continue to work on the big enterprise aspects of our cloud in terms of scale and performance, in terms of accessibility. As you said, this roll out new data residency regions this month and we continue to work with our customers on what regions they want to see us data residency remain, things like BaFin and HIPAA and all sorts of the acronym soup that comes with the enterprise. So those are all examples of where we spend our R&D dollars to continue to try to innovate on the things that customers want and are looking for. At the same time, we are obviously responsive to the environment that we just didn’t launched.

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

Hey, there. Thanks. Appreciate you taking the question. On the cloud target, can you just expand on what goes into the new range and what makes that the right range going forward? There’s some useful language in the letter, just around some assumptions that the macro worsened in the second half of the fiscal year. So maybe just what those impacts are, what gets worse and the letter calls out December as especially pronounced. I am just curious if there’s anything you can say on whether those trends how consistent in January or if things are getting worse or better? Any color there as we are just kind of sorting through everything that’s going on is helpful? Thank you.

Yeah. Thanks, Michael. This is Joe. We did take a fundamental change from our prior cloud guide in the prior quarter and that we have three months more of data points, including December, which you mentioned and we have a much clearer picture of the trend line. And using that, our cloud guidance range assumes the macro environment gets worse in H2, and as a result, the trend lines from H1 continue into H2. You will also notice we have maintained a 5-point range on that guidance with the low end of that range, not only assuming continued weakness in free-to-paid conversions and paid seat expansions that we have seen year-to-date, but also some macro impact areas that have held up really well, frankly, through the first half of FY 2023 like churn, upsell and migration. So the rest of the picture is largely in line or better than three months ago. In terms of what we have seen in January, I’d say, we have incorporated that into the guidance and it’s consistent with the assumptions that we formulate the overall approach.

Thank you.

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

Hi. Thank you very much. So we have taken the right step in bringing down the cloud targets, I think, it happened a couple of quarters consecutively. What gives you the confidence, therefore, how can we get the confidence that we are at the point where we can assess, what are the leading indicators for your cloud business kind of the rest of the business seems to be in pretty decent shape. Are you seeing any signs of stability at all, it does look like December ended on a slightly worse note than September did and hence the forecast. But what are the leading indicators that you are looking at that we should be looking at for any signs of stabilization that could help us get comfort in the cloud forecast that have moved on? Thank you so much once again.

Yeah. This is Cameron. I will take that one. So the two primary trends that we are seeing today that our headwinds are the free-to-paid conversions that we spoke about in Q1 continuing into Q2. We still see plenty of customers coming to our site, click in the try button and signing up for free versions of our products. They are just more -- they are converting to paid customers, they are taking out their credit card at a slower rate than what we see in historic trends and that’s definitely continuing from Q1 to Q2. But, obviously, we can see as forward looking, we know how many people are signing up for our products. We know the activation rates of those customers. We know they are out there and actively using the free versions of our products and we are just simply trying to get them to add their 11th and convert to a paid customer. On the user expansion side, that’s the other major headwind. This is basically people going from 20 users of Jira Software to 30 users of Jira Software. That, too, is another headwind we are seeing. We are seeing that largely slowed down across Q1 and Q2, and became more pronounced in Q2 within our smaller customer base. Once again, we see that in activity rates, we see the people adding their users and we see that in the overall monthly billing going forward. That said, as we look into this particular quarter compared from Q2 to Q3, we have seen largely the amount of customers that were downloading or downgrading from the paid plans down to our free plan. That’s all people going from 11 or 12 users to 10 or nine users, actually start to subside and that’s come back in January a little bit more positively. So we believe those are still the two headwinds that we are looking forward in the second half of the year and we have plenty of telemetry across our customer segments, geographies, industries and so on to understand if any of those trends are changing going forward.

Got it. I mean how close are we to stability in those leading indicators you are looking at if you have a view? That’s it for me.

Listen, there’s plenty of variability in the business overall today. On the top of funnel, people coming to our site and converted. I feel they are very stable between Q1 and Q2. The end user growth is much harder to predict and it might be hard to basically say whether that’s going to be leveling out or that we will see some change in the variability in the future.

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

Hi. This is Luv Sodha on for Brent Thill. Thank you for taking my question. Just wanted to ask, thank you, Scott, for laying out those top four growth priorities going forward. I guess where does Jira Work Management and Atlassian Together rank in those priorities and what traction have you seen with that product suite? Thank you.

Yeah. Luv, I can take that one. Look, we maintain incredible bullishness on our position in the Work Management space. Trello continues to be a monster. Confluence continues to grow really, really strongly. You see that with all of the enterprise improvements in the cloud, as well as automation and also of other things we shipped during the quarter. So we are very confident in the overall position we have in Work Management and especially with its connection to both the software and ITSM spaces as companies increasingly get more digital, it’s a very unique position that we play. A part of that Work Management strategy, as you pointed out, is to have multiple leading vectors, in terms of Trello, Confluence and Jira Work Management, depending on the structure people are looking for and where they are coming from and what they already have. We see great traction for Jira Work Management in terms of usage in people who are heavily into the Jira role already. If you are into the Jira family, you have Jira Software, Jira Service Management. It’s an entirely logical step for you to add Jira Work Management, and obviously, integrates with all the rest of our products very well. Thanks to the Jira platform and the Atlassian platform. It’s very early days in that product evolution. We are sort of a year and a bit in, and we continue to work with customers. It’s increasingly gratifying to see forms of standardization where people are moving off other project management vendors and collaboration vendors to standardize on Jira and Confluence and the Atlassian suite. And that’s why you see us investing in two things. One is the platform story, things like Smartlink that I have mentioned beforehand, analytics, automation, being able to automate across our product set is a big part of what customers are turning to Atlassian for. And secondly, you mentioned Atlassian Together. For those who are new, again, Atlassian Together is a packaging offering, which allows our customers to choose to take Atlassian wall-to-wall for Work Management in exchange for getting a series of different products being Jira Wealth Management, Trello, Confluence and Atlassian Access, all in the one package. It’s extremely early days for Atlassian Together, I would say. It is still in beta testing with our customers, but the reception so far has been has been really good, largely for all the customer reasons that we talked about earlier in terms of the platform and the product set.

Great. Thank you.

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

Hey, guys. Thanks for taking the question. So maybe just a two-parter. If we look into the trends around cloud revenue growth. Is there any way to get a little bit deeper in terms of the exposures for how many contextualize just the customers that are coming from the SMB side versus the enterprise side and maybe parse out where the trends got worse or stable in December and January? And then similarly, we picked up some anecdotes of server customers maybe wanting to wait a little bit more closer to the end of their service support date before migrating to either cloud or data center. So I would love to just get a sense of what you guys are seeing there versus a year ago or a quarter ago in terms of your assumptions.

Great. Once again this is Cameron. Happy to dive into both of those. So, first and foremost, on the -- what did we see last quarter when it came down to SMB or smaller customer growth versus enterprise. As we have already stated, the primary headwind that we saw more pronounced in Q2 was user expansion within our smaller customers who are largely on monthly contracts or we are moving from monthly down to our free tier and that was definitely the new piece of information that we saw in Q2. On the other side, our enterprise side of our business remain exceedingly strong with migrations with cross-sell with Jira Service Management and Jira Align, as well as our addition upgrade standard-to-premium and premium-to-enterprise offerings continue to provide very stable growth within our enterprise customer base. Obviously, with more than 250,000 customers, we believe that having such a massive customer base, a mix of SMB and enterprise globally across all industries and geographies is a massive advantage long-term for our business. As those small businesses become big businesses or more importantly, see people going from small companies into big companies and bringing the preferred tools and standards with them and that’s been core to the Atlassian strategy for some time. To answer your question on the server side of things, that’s more good news. Like, as I already mentioned, this whole transition of server customers migrating to their data center or cloud is a multiyear journey, and obviously, the core focus there was to migrate customers to the cloud and we are largely in line with all of our goals that we have set for migrations ever since we started this journey a couple of years ago. However, when we did this, whenever you announce an end of life of a product, we know we are going to lose some customers through the transition, and the good news here is, over the last couple of years, we have seen an increasing number of customers move to data center and you see that in the numbers, but as well as many of customers staying on server probably for longer than we expected. That’s actually a good thing. I see that customers will continue to go -- until February 2024 before they are going to choose go into cloud or going to data center. But overall, it shows our ability to retain our customers, shows how sticky our products are and shows how mission-critical our applications are going forward. And as I mentioned, whether Jira customer chooses server to data center or data center or server to cloud, all that shows future investment within Atlassian and commitment to our products. And I feel increasingly confident in our ability to get those customers to the cloud over the long-term regardless. Thank you.

Perfect. And maybe just small, small follow-up. And is it possible to -- is that percentage of SMB enterprise for cloud, is that 50-50, is it -- from a revenue basis, is it much more weighted towards SMB than enterprise. Any kind of quantification there?

Yeah. We do not break out the split of SMB versus enterprise. As I mentioned before, the one uptick in headwinds we saw in Q2 was the SMB user expansion. Our enterprise business continues to remain strong.

Perfect. Thank you, guys.

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

Yeah. I think -- well, I think, I will just take a question regarding developer headcount, because obviously, there’s been large numbers of headcount cuts in tech. For the most part, you don’t hear any discussion of it being better or worse for development engineering. But what are you seeing out there since where you came from is still on developer side? What are you seeing in terms of your selling into that user case of the development team? Is that getting impacted the same or disproportionately than others as people maybe slow down on new development projects I think that’s what we are seeing?

Yeah. We have taken -- so as I mentioned, back to the one primary headwind we have seen that was different in Q2, which is user expansion within our smaller customer base. When we look into that, there’s no competitive differentiation, there’s no competitive dynamic that’s changed. So it’s not like people are choosing other options or turning to other products that we see that some new competitive offering. It’s largely these customers slowing down their hiring, potentially trying to consolidate some of their licensing and the software that they over the last couple of years. But we believe long-term, technology is still a major driver of growth across many different companies and many different industries, and that will only continue to grow across all geographies. So we look across our entire customer base. We see it’s not just the tech or engineering-focused companies, but it’s in the companies in every industry, every geography have adopted technology and we see that why whenever we look at these trends that are happening, that happens broadly across all these different customer bases. So long-term, we believe, is there going to be more technology, more developers in the future that are going to use our products to get their work on and collaborate with the rest of the business? Absolutely and we are set up with our multiple offerings to take advantage of that growth.

Okay. But no relative difference in the decele between serving teams for software developers versus for IT versus for work for enterprise for business, is that correct?

Yeah. This is Scott, obviously, talking, Michael, on that one. Look, just a reminder, we always started early on serving just the developer in an organization, the person writing code. We have around helping those developers, collaborate with the rest of the organization. And so I believe that our latest number is something like a quarter of the users into software ops, developers writing code and the rest of it is product managers all the way through to designers and we -- a lot of our benefit we get exactly coordinating the work of the broader software and technology organizations through our ITSM offering that now go broader into the IT teams out there. And so whilst we sort of core of what we do is helping developers like the broader problem we solve is actually how people get work done across their organizations. And that’s I think where we remain strong versus maybe point development products that are really just for developers. And the other part is echo Cameron’s is that, no one -- it’s still early in the days of last and other things of other companies, but I haven’t heard that these developers, I am not getting other jobs elsewhere. What I am finding is those companies that struggled to hire developers previously are now able to pick up people where they couldn’t before. And so I think that further proof points that development is not and software more broadly is not going anywhere at the long-term trend. And so, yeah, there certain bumps up and down, like, as we are seeing. I don’t think we are in five developers sitting on an unemployment line for very long just because the long-term trend is more and more software.

Thanks.

Your next question comes from Arjun Bhatia from William Blair. Please go ahead.

Perfect. Thank you, guys, for taking the question. I wanted to touch on JSM and the ITSM opportunity. You certainly talked about that a lot in the shareholder letter and from what we can pick up, there’s a lot of customer partner excitement about the product. How do you -- how are the capabilities that you have developed with JSM compared to some of the larger incumbents that are in that market? And as you are increasingly selling JSM, how are you positioning it to larger enterprise customers that may already have an ITSM solution in place?

Thanks, Arjun. That’s a great question. We built our ITSM solution in three areas that I remain the reason to our customers buy it. One is it is like a consumer-like offering out there and people will choose to use something else at the back end and install JSM the front end, because of its consumer-like offering. And so in some situations in very large organizations, we fight coexistence with existing solutions where we get put in at the front end to all systems there. I guess that’s just sort of proof point that’s a great advantage for us. The second is our time to value and that time to value means that we can target the Fortune 500 with our solutions, whereas many of our competitors taking enterprise target a much smaller subset, they are willing to pay for the financial services in the six-month to 12-month onboarding and all the stuff that goes along with that and so that’s our second value prop. And the third value prop for us is that we bring IT and development closer together, and no one else can say that. And again, that’s been the history of our long association with our developers work and deep integration with all of their tools. And so our approach to this market is a long-term one. We are not aiming to go take the largest customers in this IT market to start with, because if you did that, you end up with a check box feature delivery mechanism where you need to check every box in order to switch something out and that’s not the product we want. We want to build a product that is loved by people long-term and serve the Fortune 500. And so, looking the largest of instances, we find a coexistence, where people want the things that we can bring that the incumbents can’t, but they haven’t got the bandwidth or the desire to break out some of the core systems that those large incumbents provide. In other cases, where you just don’t operate in that space at all. But we are very happy with the small, mid market sales that we make and the coexistence in those large areas, and for us, it’s a long-term gain and we believe those three advantages will play out over time.

Yeah. And other…

Go ahead. Sorry.

I will just add a couple of other items just from our go-to-market side of the house, because obviously, we have espoused the benefits in share expansion for some time. But even the last month, we have taken advantage actually of like, listen, there is macroeconomic uncertainty. People are trying to save money. In Jira Service Management, we actually increased the entry level from three agents for free to 10 agents for free, which actually is for, like, if you think about it, a company of 200 people will largely have 10 agents at most. So we are helping really get many, many, many of our existing customers or new customers coming in the door to start using Jira Service Management in anger at no cost whatsoever. And of course, over time, we will continue to get them to upgrade the paid plans or move to premium versions of our products. So, once again, in this downturn, we are taking advantage to capture market share. And then on the larger side of the house, like, in -- while we absolutely go into, hey, how do we start at a team or in a department, where can we basically help companies be a little bit more nimble, a little bit more fast and not have to think about it ripping to replace the entire IT platform, that’s been our primary strategy. However, there are many companies out there that are trying to save money, trying to consolidate spend and Jira Service Management is a massive savings compared to many of the alternatives in the industry and we give a great compelling offering for customers to move to. So we have seen other strategies across the Board pay off in the recent quarters.

Perfect. Thank you very much. Very helpful.

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

Thanks for taking the question. So data center continues to gain share as a percentage of your sales. Are you seeing stronger than expected migrations to data center instead of cloud at this point and what is driving the commentary for moderating data center growth in the second half? Thanks.

Yeah. This is Cameron again. And yeah, data center is a fantastic offering. I just have to say that. Like, there’s a reason people use data center, it’s provides the scale, mission criticality performance that many of our customers demand, especially in many of our largest enterprise customers. As I mentioned prior, this is all about a multiyear journey away from server and to cloud and data center, and we have been making cloud the primary destination for these customers and we have been seeing those migration rates to cloud, hitting very much in line with our expectations. However, many of the customers that potentially we might have seen say on server longer or potentially go to alternative solutions are choosing data centers. So we have seen data center continue to be an increasing space of demand for many of our server customers in the interim. But I also need to call out that the path from server to data center is not a dead end. We treat -- continue to see many people moving from data center to cloud. In fact, half of our migrated paid seats that go from on-premises come from data center customers to the cloud. So we see this as just a -- moving to data center is a great thing. The future investment in Atlassian, it’s more commitment to our products and absolutely sets us up for future cloud migrations in the years to come.

And then, Ryan, to take the second part of your question. In terms of the guide, we continue to expect data center revenue growth to moderate in H2, that’s primarily because we are lapping some of the event driven growth in the prior year. I would also highlight, though, our outlook is better than we expected three months ago, driven by the strong Q2 billings performance that we saw. And then, lastly, it’s always good to remind everyone that data center revenue growth can be volatile given the portion of upfront revenue recognition in DC sales. So, as you think about the DC business performance, keep that in mind, as well as some of the pricing changes that are being implemented this month.

Appreciate the color. Thanks.

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

Thanks. I want to go back to Work Management at the last Investor Day, this was one of the three key pillars of growth for you going forward and not mentioned even once in your press release, which I found quite strange. Can you -- outside of Confluence, can you talk about the rest of the portfolio there, would it be fair to say that growth over there is perhaps underwhelming, that competitively you are not getting the win rates that you would like to see against, yes and no, the Mondays of the world [ph]. Help me understand why such an important area of investment growth is not mentioned even once in your press release?

Yeah. I will take that, Ittai. I am not -- no, I wouldn’t be curious at all. Look, I think, we are incredibly bullish on Work Management. So to your question there, I don’t think so. It’s -- I would say, it’s a different point in its life cycle as a market currently to where ITSM is, which is why us calling that out particularly in the press release. There are no favorite children at Atlassian don’t worry. Atlas is doing really well, right? But it’s a very new product. We always say it takes two years, three years, four years, five years to build a great product and a franchise, and we are patient long-term investors towards doing that. Everything in Work Management is targeted towards the Fortune 500,000. So Atlas and Jira Work Management, both of which are the newest offerings in that space. It’s early in their journey. I can’t say that enough, but we are pretty bullish, both Scott and I have been around two decades now and seen plenty of 1.0 products and 1.1 products and 2.0 products and understand how product S codes of adoption work in our customer base and so we are working diligently on that and both the teams are working really hard there. Confluence continues to go from strength-to-strength. It’s always been a shining light in the Atlassian portfolio and continues to be so. So it doesn’t mean from the press release or anything else that we aren’t there. Again, we continue to get analyst recommendations and plaudits in various different waves and charts and all the different bits and pieces there. And we continue to get great encouragement from our customers that we are the only Work Management vendor at scale and we are one of the largest scale wealth management voters out there that combines their technical and non-technical teams. This is increasingly a challenge for customers as they look across all sorts of different work that they are trying to manage. Just as Cameron and Scott were talking about, ITSM being close to the modern ways of operating DevOps and DevSecOps and everything else. Same with work management, how do you get your marketing and finance and business teams closer to your engineering and operations teams, that’s a huge strength of ours in the area that we continue to do well from.

Great. Good. I appreciate it. Thank you.

Can I just come in there, if I -- just before we move on, because one thing we tried to do, we have got so much great news at Atlassian and one thing we try to do with our shareholder letters, we focus on one of our three markets at a time. And so last quarter, we focused entirely on Work Management, and this quarter, we chose another market. And so, hopefully, we don’t continue to -- we are doing that. But what we really wanted to do is go deeper on one market at a time to help educate you our investors. And so, I have to say, I want to get that across to people, maybe next quarter this people will think if we provide something else and that was the intent behind it. And again, think like, for us the way the collaborative work highlighted were a strong performer in our press release and so forth. But our intent is to go deep once a quarter with one market.

Thank you so much.

Your next question comes from Cindy Frances [ph] from Citi. Please go ahead.

It’s Fatima Boolani from Citi. That’s the first time I heard that. Thank you for taking my question. Either for Joe or Cameron, I wanted to ask a broader question about your pricing strategy. So we appreciate you have been very consistent and transparent with your pricing increases in the base as it relates the server offerings and related maintenance offerings, as well as data center and data center maintenance. But I am curious to get your perspective on what type of customer feedback you are getting clearly because we are kind of in a different state of the market environment and in the macro environment. So I wanted to assess if there’s maybe potential fatigue from customers in terms of the discussions you are having on this front as you take prices up. And as a related matter, if you raise the floor on the pricing on these predecessors or form factors, relative to cloud, why is it that we are not necessarily seeing a more pronounced follow-through in cloud migration? Thank you.

Yeah. This is Cameron. I am happy to talk about pricing strategy. It is a large portion of my day. So effectively, I think, you nailed one of the key points is consistency. Largely, we have been very consistent in the last few years in the size, quantum and timing of both our cloud price increases, as well as our server and data center price increases. And that actually is to our advantage. Many of our customers understand, they expect and they budget ahead of those pricing. You also realize from a macro pricing perspective, Atlassian, our overall strategy is still to be the value leader that we are, when you look to a potential alternatives that at any -- they are close to the feature comparison, we are a fraction of the price of those competitors. So we always maintain that from that perspective. I will be perfectly honest, going into this fiscal year and planning out our price increases, the cloud price increases in October and the server data center price increases in February that, I had my concerns, I have met with many of my customer -- my customer-facing teams, our renewal teams and so on to discuss how we were going to address potential customer feedback, and of course, how we are going to plan and address that. I am very happy to say that, actually the price increases that we have done recently, both in October and now, actually it had no material different feedback from our customers than we have seen in previous years. So I have to say that, that’s a very big positive for us right now and once again shows the value that our products deliver. On your next piece is, well, hey, you are doing these price increases, you are doing larger price increases on your server and data center products to effectively more incentivize the customers to choose cloud and I have to say, actually, that is driving exactly what we have expected on our cloud migrations and that’s why our cloud migrations are going -- driving that 10% growth that we have communicated over and again. However, whenever we do a price increase on, say, server or data center, we also see customers having the option to go, hey, you know what we are thinking about data center, now is a very, very good time. Let’s do that before that price increase goes fully effective and we will see that uptick as well. That’s really impossible to understand exactly those dynamics of who’s going to choose cloud or data center through all of that. But in general, what we have seen overall is much more customers sticking with us, either choosing to renew server or move to data center or move to cloud than we originally expected when we started this journey a couple of years ago. So, overall, no major pushback on our pricing strategy and our pricing strategy is delivering exactly what we engineered it to do, which is to incentivize our customers to choose cloud.

I appreciate it. Thank you.

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

Thank you for taking my question today and all the details that you have been providing on all these other questions. Going to piece together a couple of comments that you have made so far and see number one, if I am understanding this and what the implications might be. Correct me if I am wrong, but it sounds like more of the headcount headwinds you have been seeing are really more on the non-technical side. I think you had a good case around developers are finding jobs easily and the strength in JSM and things like IT suggesting strength there. So correct me if I am wrong, that that’s where more the headcount headwinds are on the more non-technical side? And then I am trying to square that with what I have considered to be a very understandable story for these non-technical people being a very natural and important part of delivering products. What are you seeing that’s driving the weakness in those employees and how your customers are working? Are they changing how they work -- how they work and what confidence do you have that after this macro, they are going to go back to having the scale of teams that they might have had before on the non-technical side that will bring back the growth on that side of the business?

Hey. It’s Scott here. And I think what you are asking is, hey, there’s a lot of tailwind behind software over the last couple of years. What does the future look like in those areas? And I get confidence around Atlassian for a whole bunch of ratings. One is that, software is a general category and going anywhere, like, it’s in every area, whether it’s cards or it’s delivery or the AI/ML and stuff like that, that’s all going to affect everything like that we believe like all these innovations are going to require software developers. And so there’s macro time, like, yeah, people rebalancing their software teams at the moment, but the long-term trend is strong, but like there can be more and more people there. Two is that because Atlassian helps connect the entire organization to get work done and we hope basically move more forward across the entire organization, we are not to holding to just the R&D headcount. And so as companies increase all the people involved with technical areas or non-technical areas, we are there to help them collaborate and so that helps me do well. Also, if you look at our penetration inside companies, our largest accounts are smallest accounts, like we still have large increases like we are very well penetrated in the organization. And so I get comfort that over time our seats per customer will go up and we are not any sort of point of saturation there. And lastly, if you look at the products, like, our product customer or products to see is still relatively low compared to the opportunity we have ahead of us. And so we have always tried to focus on not the things that do change but the things that don’t change over the long-term, I know Jefferies just talked about at Amazon, that’s something they focus on is -- focus on things on -- investments on areas that don’t change. And teamwork and humans working together is a problem that’s always going to exist over the long-term and that’s where our investments have been. So I can’t predict the next 18 months, what look like in the broader macro economy, but I woke up and I feel like very well placed for the long-term.

Thank you.

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

Thanks for the question. This is Mark on for Adam. I kind of wonder how level that the TEAM was asking and I was wondering if you could expand upon the impact of migrating data center and server advantage pricing customers to list pricing in regards to how that’s baked into the revenue margin guidance you just provided? Thank you.

Well, I can speak. This is Cameron again. I will speak to the overall -- how we think about the pricing strategy broadly. The idea here right now, as you know, many of our server -- the server pricing that we have today, especially for higher tier customers, above 500 users on our 2,000 user 10,000 limited. There’s a significant price difference between server and data center or cloud. Today, if the customer chooses cloud over data center for those customers, cloud is a less expensive option. However, the bulk of our data center customers are sitting on pricing that is significantly less than our cloud list price today. And what you have seen over the last few years is us doing incremental price increases to effectively close that gap. All that pricing is available online. We expose all of it to our customers. None of it is hidden. All of our customers get the same price. And if you look to our historic price changes over the last few years, you can see that we are slowly closing that gap between legacy data center pricing and our cloud list price. So within the next few years, eventually all customers, at least ,from a pricing perspective, have the incentive to choose cloud regardless. As far as how much growth that’s driving for our business, once again, that goal of 10% of revenue growth in the cloud is coming from these server or data center to cloud migrations.

And then, Mark, this is Joe. The guidance -- the revenue guidance incorporates what Cam just said. We continue to assume that migrations will remain healthy. And then I would also say from a pricing impact on the model, just keep in mind, we do have ratable recognition on subscription which is over 80% of our revenue. So the timing on the renewals that happened throughout the year, you won’t see an impact when we go through those types of pricing changes. So we have also included that in the guidance as well.

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

Yes. Thank you for taking the question. Just wanted to double click on some of the investments you are making around the enterprise strategy. Can you just give an update what you are doing there to drive traction, maybe speak to some of the partner consolidation that’s occurred recently. And if there’s anything you are doing differently there to drive further migration and maybe speak to some of the multiyear contracts that were called out most recently to exit this quarter? Thank you.

Yeah. Hi, Ari. Let me take the first half of that and then I will leave Cameron do the second half on the multiyear contracts. From the point of view of what we are doing, we have been on a long and consistent journey, right? We continue to be long-term oriented and thoughtful about how we approach the enterprise space as one of our major transformation as a business over the last decade, you would argue. In terms of specifically what we are doing? Look, you have seen us continue to open performance and scale. So the scale offering we have continued to move up in the cloud. We now have 35,000 users in GA and 50,000 users is in EAP and you can bet that we have teams continuing to work on those sorts of aspects. At the same time, our performance for individual customers has massively improved at those life scales over time. So it’s not just the ability to handle user volume, it is about the performance that those customers get, especially in lower spec to desktop environments with other Internet connections as we continue to get more and more global and have customers and users all around the world. We continue to work on governance. We long believers that, if you look forward, you are going to have more governmental regulation in different countries, different geographies, different industry areas and that our platform and our infrastructure has to handle that. You saw that this quarter, we shipped a data residency in Germany. We continue in testing in other regions. We continue to do things like BaFin and financial services compliance in different areas of the world and we will continue to add more in those areas as we build them out over time. You can see all the details in the apps that we give over time. And the third part we are working on is continuing and extensibility in the cloud. The reason that, that’s an enterprise concern is, because obviously, the larger our customers are the more they customize our software for themselves. Forge is a fantastic mechanism to customize our cloud offerings for themselves. Larger customers tend to have very bespoke things they want to integrate with various internal systems. The ability to do that have us run it for them, have us handle things like data residency and handle the server loads and everything for them is a huge benefit of the cloud and we see customers moving for reasons like that. It simplifies their offering is one of our goals with the cloud right. We do all the hard yards so they can just focus on their businesses. Cameron?

Yeah. And in addition to all of the R&D investments we have made to better serve our enterprise customers, I am extremely happy and proud of what we consider our enterprise transformation on the go-to-market side of our business. We have invested heavily to get closer to our largest customers and help them through this strategic transformation to the cloud, while maintaining some of the most efficient sales and marketing spend that you see in the industry and that’s the balancing act that we have had over the last couple of years. But do you think we have had much more enterprise account managers to take care of our customers. We invested in technical account managers and solution architects to have more strategic conversations about the road map with our products longer term. We have things like executive advisory boards and deep dives and CIO counsel. This has actually allowed us to have strategic relationships with our customers and think much more long-term about how our products will be used in the future in their businesses. You also mentioned you saw this in our channel with our partners that we have seen significant outside investment, as well as consolidation in our massive solution partner network. While we have over 700 solution partners, we see many of these customers or many of these partners starting to consolidate. I see this as a massive advantage for our customers as these companies provide more scale and more optionality for our customers and once again deliver more value, but also good for our ecosystem. Like any additional investment in our ecosystem will only drive higher, better outcomes for our business and for our customers. And lastly, on the multiyear piece, it’s simply the nature of larger, more strategic deals. If we are going to go into one of the largest banks in the world or a large pharmaceutical or telecommunications firms, we are having a conversation with the CIO about a transformation to the cloud or enabling IT service management or work manager for their organizations. They are going to want a longer term commitment and that’s where you see these multiyear contracts increasing in the enterprise.

Thanks.

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

Thanks everyone for joining our call today. As always, we appreciate your thoughts or questions and your continued support. And thank you to all the Atlassian all over the world for your dedication and resiliency. We hope that you are able to join us next week, either in person in Berlin or virtually at our Agile and DevOps event, Unleash.