# Atlassian Corporation

### NasdaqGS:TEAM
## Earnings Call

_Thursday, February 1, 2024 10:00 PM GMT_

### CALL PARTICIPANTS 2

 PRESENTATION 3

 QUESTION AND ANSWER 5

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## Call Participants

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**EXECUTIVES**

**Joseph Binz**
_CFO & Principal Financial Officer_

**Martin Lam**
_Head of Investor Relations_

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_


**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

**ANALYSTS**

**Aleksandr J. Zukin**
_Wolfe Research, LLC_

**Ari Nareg Terjanian**
_Cleveland Research Company LLC_

**Brent John Thill**
_Jefferies LLC, Research Division_

**Fatima Aslam Boolani**
_Citigroup Inc. Exchange Research_

**Frederick Christian Havemeyer**
_Macquarie Research_

**Gregg Steven Moskowitz**
_Mizuho Securities USA LLC,_
_Research Division_

**Karl Emil Keirstead**
_UBS Investment Bank, Research_
_Division_

**Kasthuri Gopalan Rangan**
_Goldman Sachs Group, Inc.,_
_Research Division_


**Keith Weiss**
_Morgan Stanley, Research Division_

**Keith Frances Bachman**
_BMO Capital Markets Equity_
_Research_

**Michael James Turrin**
_Wells Fargo Securities, LLC,_
_Research Division_

**Nicholas William Altmann**
_Scotiabank Global Banking and_
_Markets, Research Division_

**Ryan Patrick MacWilliams**
_Barclays Bank PLC, Research_
_Division_


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## Presentation
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**Operator**

Good afternoon, and thank you for joining Atlassian's Earnings Conference Call for the second quarter of
fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on
the Investor Relations section of Atlassian's website following this call.

I will now hand the call over to Martin Lam, Atlassian's Head of Investor Relations.

**Martin Lam**
_Head of Investor Relations_

Welcome to Atlassian's Second 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, and Scott Farquhar; and Mike
Cannon-Brookes, 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 of fiscal year 2024. The shareholder letter is available on Atlassian's
Work Life blog and the Investor Relations section of our website, where you will also find other earningsrelated 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. But
during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will
include forward-looking statements. Forward-looking statements involve known and unknown risks,
uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions
prove incorrect, our results could differ materially from the results expressed or implied by the forwardlooking statements we have.

You should not rely upon forward-looking statements as predictions of future events. Forward-looking
statements represent our management's beliefs and assumptions only as of the date such statements are
made, and we undertake no obligation to update or revise such statements should they change or cease to
be current. Further information on these and other factors that could affect our business performance and
financial results is included in the filings we make with the Securities and Exchange Commission from time
to time, including the section titled Risk Factors in our most recently filed annual and quarterly reports.

During today's call, we will also include non-GAAP financial measures. These non-GAAP financial measures
are in addition to and are not a substitute for or superior to measures of financial performance prepared
in accordance with GAAP. 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-Founder, Co-CEO & Director_

Thank you for joining us today. As we've already read in our shareholder letter, Q2 was full of significant
milestones for Atlassian. When we first went public 8 years ago, we had just over $100 million in quarterly
revenue and supported 54,000 customers. Fast forward to today, and we've just posted our first $1 billion
revenue quarter, due to software crossed $1 billion in Cloud ARR and we surpassed 300,000 customers.

These accomplishments are a true testament to our amazing team, our diverse and passionate customer
base and the high-value mission-critical products we deliver. Mike and I are extremely proud and thankful
for every single asking his help to get a few. In Q2, our R&D engine continue to deliver incredible
innovation across our Cloud platform. We rolled out Compass, virtual agent capabilities in Jira Service
Management on our first slide is the last intelligent capabilities into general availability.


-----

We also welcomed Loom to the Atlassian family and have been thrilled to see the team deliver on their
ambitious AI vision with many new features including enhanced editing experience that makes updating
video as easy as editing and text documents. Customers see the value where we're delivering in the Cloud
and are turning to us for strategic guidance on how we can unleash the potential for their teams. We're
excited by the momentum we are seeing across the business and remain laser-focused on executing
against our key strategic priorities: Cloud migrations, serving the enterprise, IPSM, and now AI.

And we're in a great position to get after them with massive market opportunities, strong customer
commitment to the [ icing ] platform, a unique ability to combine over 20 years of insights with the
immense power of AI, and most importantly, a world-class team.
With that, I'll pass the call to the operator for Q&A.


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## Question and Answer
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**Operator**

[Operator Instructions] Your first question comes from Keith Weiss from Morgan Stanley.

**Keith Weiss**
_Morgan Stanley, Research Division_

Congratulations on a lot of milestones this quarter and what looks like a solid quarter. In the shareholder
letter, you talked about even absent room still expecting an acceleration in the Cloud business into the
second half. It sounds like you saw some signs of stabilization in the quarter, but I was hoping you could
drill in a little bit further what gives you guys the confidence to look for that to expect that acceleration
into the back half of the year? And what still seems to be an uneven macro environment?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes. Thanks, Keith. This is Joe. Let me start with the Cloud revenue results in Q2. They were up 27.5%.
Loom contributed about 1 point of growth. So our results ex Loom landed in the middle of our guidance
range for the quarter. There were a few cross currents in that performance. So let me walk through
them in terms of consumer -- customer segments and growth driver trends to try and help. And then I'll
transition into your question on the confidence around H2.

From a customer segment perspective, we had very strong sales execution in the quarter, which drove
healthy performance in our enterprise customer segment. This resulted in better-than-expected billings on
an annual and large multiyear deals. A significant portion of which landed on the balance sheet, unearned
revenue. This also drove healthy upsell to premium versions of our products.

Results conversely in SMB were slightly lower than we expected, and that was driven by paid seat
expansion and a mix shift from monthly to annual subscriptions, which, as you know, signal stronger
customers' commitment but also carries lower pricing. And as you know, dynamics in the SMB business,
good or bad, are largely realized in the quarter given the linearity in that part of the business. In terms of
the trends on our key growth drivers in the quarter, migrations from server and data center exceeded our
expectations, and that's driven by the significant investment and execution focus we put there.

In terms of paid seat expansion, while the overall rate of paid seat expansion remained lower than the
prior year, the pace of deceleration or slope of that trend continued to moderate from Q1. And within that
trend, as mentioned earlier, enterprise was better than expected and SMB was slightly worse. We also saw
the rate at which customers convert from free to paid at the top of our funnel stabilized relative to Q1 and
that's another positive leading indicator.

And then finally, other Cloud growth drivers like cross-sell and customer retention churn and monthly
active usage continued to be very healthy and performed in line with our expectations. And beyond that,
we didn't really see anything noteworthy in terms of linearity in the quarter or across products, regions or
verticals that were largely in line with our expectations. In terms of the confidence around the H2 guide,
the midpoint of our H2 cloud guidance range ex Loom does assume slightly accelerating growth rates.
The factors that give me confidence are the recognition of those strong Q2 billings on annual and large
multiyear agreements rolling off the balance sheet.

The increasing momentum on Cloud migrations as we focus on unblocking more customers for moving
to the cloud, and continuing to bring new innovation and value to our cloud offering. The benefit of price
increases that are laddering into the model and the momentum we're seeing in enterprise driving healthy
upsell to premium and enterprise versions of our products. I talked about the slope of the trend line on
paid seat expansion rates, and that continues to moderate quarter-over-quarter.


-----

And I also mentioned the leading indicator around free-to-pay conversions at the top of the funnel. So
those are the types of things that give me confidence in the ability to deliver accelerating cloud revenue
growth in the second half of the year. And I hope that helps.

**Operator**

Your next question comes from Michael Turrin from Wells Fargo.

**Michael James Turrin**
_Wells Fargo Securities, LLC, Research Division_

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

**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

Michael, thanks for the question, Scott here. Firstly, for those new to you asking story, just a reminder,
we said historically that about 10 points of our Cloud growth has come from migrations. And for those you
really knew the asking story, this coming quarter in the next few weeks, we will have our end of server
support will be happening, which has been a 3-plus year journey with our customers. And so there's 3
points I want to make in answer to your question, Michael.

Firstly is that migrations will continue for multiple years. And we said historically that about half our
migrations to the cloud come from our data center customers. In this last quarter, even with a lot of server
customers migrating with the end of support. 60% of our migrations in quarter came from data center
customers. So with that, we expect to see migrations continue for a long time to come. And we've also
made huge R&D investments in order to continue our customers moving to the Cloud and you continue to
see us doing that.

We've launched data residency in Canada. This last quarter, we also bring your own key secure software.
We continue to remove boxes for our cloud customers and that continues to open up the aperture of
migrations. The second point I'd like to make is that Cloud continues to be the gateway to full [ lacking ]
experience. And Customers once they get to Cloud are really getting the best we can offer. And you
see us continue to deliver innovation in Cloud. So whether that's comfort, which has continued to grow

[ Durafort ] discovery, which we talked about passing 4,000 paying customers also won in our ecosystem
and all the AI functionality that we have already developed and continue to develop are only available in
Cloud.

And so with that, our customers get a better experience, but we also have an incredible opportunity
to sell customers more products and more functionality that really makes a difference for them. And
lastly, enterprise, the third thing of enterprise, which is through these migrations and having these
discussions with customers around migrating to cloud, we've really deepened our relationships with
our best customers, whether they're North American financial services customers or German auto
manufacturers. These discussions have led to us being seen more and more as a strategic partner for
them, and they want to do more with us. And you saw that -- we talked about Mercedes Benz in our letter
of Mercedes Benz migrated 30,000 fleets from data center to cloud and Jira and Confluence. And as part of
that, we're so excited by the usage of our ITSM solution in that process that they then have adopted that
and started using it with their customers. And so we are becoming more and more a strategic partner for
these large enterprises. Joe, do you want to talk about some of the puts and takes?

**Joseph Binz**
_CFO & Principal Financial Officer_


-----

Yes. Thanks, Scott. Michael, it's really too early to give a specific number on the migration impact to cloud
revenue growth beyond FY '24. And I would just echo what Scott said. We continue to expect migrations
to be a significant driver of cloud revenue growth in FY '25 and beyond. That's driven primarily by the
significant size of the data center installed base. There's a lot of opportunity there because those are some
of our very largest customers. And for them, it's more a question of when and not if they move to the
cloud. So we continue to expect to see migrations be a significant driver of cloud revenue growth beyond
FY '24.

**Operator**

Your next question comes from Gregg Moskowitz from Mizuho Securities.

**Gregg Steven Moskowitz**
_Mizuho Securities USA LLC, Research Division_

Okay. And maybe I'll focus on the data center business. So it's impressive that, that business is still
actually growing 30% plus, even after adjusting for the net benefit from migrations, obviously, 41%
reported. Joe, when you look at that strong growth, how should we think about the relative contributions
from installed base expansion versus pricing versus net new logos?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes. Thanks, Gregg. You're right. It was another strong quarter for data center. It was solidly ahead of
our expectations, driven by stronger-than-expected migrations from server that's partially offset, as you
pointed out, by the stronger migrations to Cloud, I'd say the biggest driver once you get past the net
migration impact is really seat expansion. And that goes to my point earlier around paid seat expansion
performance in enterprise was actually quite strong this quarter.

And so we believe that's a statement around macro as well as our ability to serve those customers and
the big investments that we've made to improve our enterprise-grade capabilities address things like
scalability, certifications, data residency, app integration, all these things are very compelling in moving
customers to the Cloud, but also in terms of -- and as a result of that, customers are staying with us, and
they're moving to data centers a stepping stone that will ultimately result in a migration down the road.
So it's primarily paid seat expansion from our perspective once you get past the migration impacts.

**Operator**

Your next question comes from Fred Havemeyer from Macquarie. .

**Frederick Christian Havemeyer**
_Macquarie Research_

I wanted to ask, as we start this year, we've once again seen that layoffs in the tech industry have been
picking up, although it was substantially lower scale than what we saw in the prior year. So I wanted to
ask, as we look at your outlook and the cloud revenue growth, how comfortable do you feel that guidance
is once again derisk for the potential impacts from any sort of layoffs in the tech industry. And secondly,
have you seen any signs at all that these layoffs may be impacting anything in your free-to-pay conversion
or anything else to date?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes. Thanks, Fred. We haven't seen a dramatically different impact than we expected coming into the
year relative to the recent announcements. Obviously, it's something we keep an eye on and track. If you
think about the guidance, we really haven't changed conceptually how we freshened the guidance ranges
for the Cloud. Just to reiterate, the high end of our cloud guidance range for the year assumes healthy
acceleration in H2 growth rates that we talked about with Keith.


-----

That's driven led by less macro headwinds and the related impact that would have on improving paid seat
expansion. It also assumes strong migrations from server to cloud following server end to support and
continued strength in data center migrations cross-sell, upsell and customer retention. On the low end
of the guide, that -- for the year, that does assume increasing macro headwinds and the impacts you're
talking about and the related impact that would have, not only on paid seat expansion, but also areas of
our business that have held up well to date, such as migrations and cross-sell and upsell.

And then lastly, I would assume we do a relatively -- we get relatively weak results post server end to
support on migrations from server to cloud. So at the midpoint of our guidance, we're assuming that paid
seat expansion rates are kind of steady to where they are today, that drives slightly accelerated revenue
growth. At the high end of the range, we get favorable macroeconomic outcomes that drive improvement
in that and thus better revenue. On the low end, we assume that we see the headwinds and that impacts
those paid seat expansion rates.

**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

Just to add on to Joe there. He talked about [ F&B ] [ P2 ] expansion being a bit weaker. We're going
to over the enterprise business, and we're talking with our biggest customers. I see great excitement
amongst them for what we're providing. And that comes in a lot of different ways. It comes in competitive
switch-out. We see a lot of our customers looking to us to replace more expensive versions of other
products at this particular stage.

I had thought that might happen early in the economic cycle, but it's actually showing up pretty strongly
now in a lot of the deals that we're doing of replacing other products out there that might be older and/
or more expensive. We're also seeing that in AI and the excitement around customers who are excited to
use our AI features. And then the new products that we are delivering in Cloud are having great customer
reception. They still very early days. I think that [ Gerard ] Discovery is a great example we talked about
where we're delivering innovation and value to these customers in Cloud and they're picking it up and
running with it. So they're all strong areas that I think, are sort of counter to any way of in technologies.

**Operator**

Your next question comes from Karl Keirstead from UBS.

**Karl Emil Keirstead**
_UBS Investment Bank, Research Division_

I'd like to focus on the remaining server cohort. The sequential decline in server maintenance of $10
million was at least a little bit less than I was modeling. Are you surprised by that stickiness? Can you
offer us any help in sizing the cohort that will likely not migrate at the end of support date and continue
to run on supported versions and perhaps offer a little color as to what that cohort looks like in terms of
customer size, vertical, anything?

**Joseph Binz**
_CFO & Principal Financial Officer_

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

In general, what we're seeing is better renewals, better customer retention and less-than-expected churn,
which highlights the mission-critical nature of our product and customer commitment to Atlassian's road
map and platform. And of course, it also means mathematically, we have a bigger opportunity than we
originally thought in terms of future seat migrations to the Cloud, which is a great position to be in.

In terms of the end of support moment, we're about 2 weeks out. And really, there's been no change
from what we discussed last quarter other than that we're seeing those stronger renewals and customer


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retention. We end of support in a couple of weeks. There's been no change to our focus around migrating
as many of those server customers as possible. The customers that remain on that server installed
base are predominantly larger, more complex accounts that are typically blocked from the Cloud at the
moment. So we continue to expect most of those customers that migrate -- will migrate the data center.
And we continue to hold prudent assumptions to account for customers who will choose not to migrate in
FY '24, and that's also factored into our guidance.

**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

Yes. Just to add some color there. I think Joe's talked to the financial aspect of it. Obviously, with an endof-life moment, it's hard to predict a week-by-week basis exactly what happens. So we've put a lot of test
into looking at every single customer that still exists on server and what it will take to get them across
the Cloud in an ideal sense or to data center if they [ partnered ] there. as Joe referenced, we really
comfortable [ stickiness ] of our products and kind of a testament to what we've built and how valuable we
are for our customers that we haven't seen churn there.

And for many of these customers who can't move to Cloud, data center is a drop in replacement that does
not require many months of planning. And so customers can leave it to the last minute and switch out to
data center, and I expect to see what of that happen as we cross the end of server support threshold in
the next few weeks.

**Operator**

Your next question comes from Kasthuri Rangan from Goldman Sachs.

**Kasthuri Gopalan Rangan**
_Goldman Sachs Group, Inc., Research Division_

Congratulations on the results. From a trend line standpoint, the Cloud migration is a big opportunity,
clearly. But when you look at the trend over the last 5 to 6 quarters or so, the Cloud has decelerated from
49% or so. I think it was Q1 last year to 27%, and a big chunk of that is coming from migration. So if
you look at the net underlying Cloud growth rate, it has decelerated or server continues to -- data center
from [ trust ] continues to be a champion. It's gone from 54% or sort of 41%. Can you help understand
what could be causing the dichotomy that -- maybe there is a preference for the data center product. If
that's the case, then what does the long term look like for the company? Because companies generally
either have a cloud product that wins or an on-prem that wins rarely does both win, but maybe it does for
Atlassian. Can you help us understand what are you really betting on and with your customers? Where do
you wish your customers to really go and how are you going to make it happen?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes, Kash, this is Joe. Customers are not choosing data center over cloud. What's happening here is server
migration to data center and cloud both exceeded our expectations. And so we don't see more customers
choosing one over the other. If there was any weakness in our cloud performance versus expectations,
it's that paid seat expansion has been lower than we expected. And this quarter, it was slightly lower than
we expected, particularly in DC strength on the other hand, as I mentioned earlier, was also driven by
stronger migrations from server as well as paid seat expansion.

So we feel really good about the fact that customers are looking at data center as a stepping stone to the
Cloud and ultimately, we want to get those customers to the Cloud because that's where our customers
receive the best experience, the most secure experience from Atlassian, and it gives us a chance to add
more and more value over time, as Scott discussed earlier in the call.

**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

Let me add to that, which is every customer I've talked to, whether that be a German bank kind of we
would consider on a more conservative end of the scale through to small, medium-sized businesses out


-----

there even in regulated environments. All of them are telling me the Cloud is the future. And if you went
5 years ago, we were telling customers Cloud with the future. These days customers are doing calling
me. That's the case. And in many cases, they either need the time to plan a migration if we've got tens of
thousands of users, that is a chance not only to migrate to the product we have in Cloud but expand your
usage of Atlassian, look at other products that we can replace and so we see a lot of that happening, but
that takes a little bit of time at the largest customers or in some cases, but decreasing our customers are
bottom Cloud and they are pushing us to say, "Oh, I need data residency or a certification or FedRAMP".
So we're thinking about a lot of that with our customers.

**Operator**

Your next question comes from Nick Altmann from Scotia Bank.

**Nicholas William Altmann**
_Scotiabank Global Banking and Markets, Research Division_

Awesome. I wanted to circle back to sort of the stabilization in the free-to-pay conversion. I guess when
you think about how in the quarter, you saw that stabilize. Do you think that was an anomaly just because
perhaps as a stronger spending period for software? Or you kind of see it stabilizing over the next coming
quarters?

**Joseph Binz**
_CFO & Principal Financial Officer_

Thanks for the question. We do see it as a stabilizing -- durable stabilizing factor. We think it's super
important because it's a leading indicator of success today's land and new customers are tomorrow's
expansion opportunity. So we fundamentally believe that a lot of that is macro driven. I'd also say we've
done a good job of investing to improve the efficiency of our funnel and to improve the efficiency and the
hit rate on that free-to-paid conversion. And so hats to the team inside Atlassian is doing a phenomenal
job on driving improvement there. So some of it is macro, some of it is absolutely our own execution. And
overall, we feel it's durable moving forward.

**Operator**

Your next question comes from Ryan MacWilliams from Barclays.

**Ryan Patrick MacWilliams**
_Barclays Bank PLC, Research Division_

Great to see data centers driving more than 60% of Cloud migrations at this point. So in the shareholder
letter, and you've just been mentioning how you've been unblocking some of the largest customers on
data center to help them move the Cloud. Do you have a rough idea of what percentage of data center
revenue you would consider block today? And if unblock, will these customers be willing to move to the
cloud after recently moving to data center

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes, Ryan, we're not going to -- I'm not going to able to -- sorry, go ahead, Scott.

Yes. Ryan, I was going to say we're not going to be able to provide a breakdown today on what that block
percentage is. Keep in mind, those data center customers are primarily our largest and most complex so
you can imagine it's all the things we're investing against and making progress on. I mentioned earlier,
scalability, data residency, certifications, app integration, a lot of investment, a lot of effort going to
unblock that. That's why we're confident in the ability to continue to grow migrations from data center
to cloud. And so we feel very confident in our ability to continue to drive migration over the next coming
years.

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_


-----

And Ryan, just to chime in, this is Mike here. I'll give you over to a brief [ case ] can ask any product
questions today. I've also it's about the long-term partnership with our customers. I think that's really
important, even more so for the biggest of the big. One of the things that the customers will tell us
is they've been really impressed by our delivery over the last 3 to 5 years in the cloud of enterprise
capabilities. We have a public cloud road map.

So we do talk about federal delivery, data residency delivery, compliance delivery across all the different
geographies that we operate in. The last quarter, we hit 100% of that road map in terms of delivery on
time and what that's building is this long-term strategic partnership, long-term relationship with those
biggest with the big customers. We believe in our enterprise business over the next decade and hopefully
many decades, it's about building a partnership with those biggest customers that we have.

And that partnership is built on trust. It's built on continued delivery of the things that we say we're going
to deliver. And when you talk to those customers, as Scott mentioned, they are believing that Cloud is
their long-term future. They understand that. They're working on moving in all sorts of different rates. We
have a great proportion of our migrations coming from data center today, but that engineering delivery
has been a hallmark of our strength in terms of building that partnership with those customers. And
obviously, we intend to continue that over time.

**Operator**

Your next question comes from Keith Bachman from BMO.

**Keith Frances Bachman**
_BMO Capital Markets Equity Research_

Congratulations on the solid quarter and guide. Joe, I wanted to direct this for you. You've implicitly given
us guidance for the June quarter, which is post the expiration of server. And I just wanted to get your
thoughts to what extent is the June quarter a reasonable proxy without -- for FY '25 growth rate. So I'm
not asking for '25, but I'm just asking, is there anything usual in the implied growth rates for cloud and
data center that we should think about as we're considering our '25 estimates. In other words, is the
February deadline going to pull forward a bunch of revenues? Or is there anything else that we should
think about for that June quarter exit run rate?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes, thanks. It's really too early to talk specifically about FY '25. In general, I'll talk a little bit about the
individual lines. If you look at data center, we do expect growth rates there will continue to decelerate
as server to data center migrations drop essentially to zero and the data center to cloud migrations
accelerate as we continue to deliver on removing Cloud blockers.

In terms of the Cloud, we've talked a lot on the call about migrations being a multiyear journey, so I
won't rehash that. In addition to that, keep in mind, we have a number of other drivers in that model.
First of all, paid seat expansion within existing customers is the biggest driver and even bigger than
the migrations factor that we've talked about. And that has been an area in the model that's been most
impacted by macro headwinds over the last year.

So a lot of your view on '25 is going to depend on macro outcomes. Then our opportunity to crosssell additional products to our over 300,000 existing customers, our ability to upsell the premium and
enterprise additions of our products is another significant growth driver. And then with the smaller impact,
other drivers like the free-to-pay conversion that we've talked about, the price increases that we've made
and new high-growth products like Compass, Jira Product Discovery and Loom. And I'd just point out,
we're in a super dynamic space right now, particularly with and there's a lot of opportunity to add value
with solid execution.

So we feel very confident in our ability to deliver healthy revenue growth over a multiyear period in the
Cloud. And then obviously, server is going to be zero essentially in 2 weeks when we get to the server
and to support. So that's the color I'd give you for now. We'll continue to update you over the course of


-----

the next 6 months. But that's how I would -- that's where our mindset is, and that's how I think about it
directionally.

**Operator**

Your next question comes from Fatima Boolani from Citi.

**Fatima Aslam Boolani**
_Citigroup Inc. Exchange Research_

I just wanted to shift gears to Jira Service Management. You're clocking in about 50,000 customers since
about 3, 3.5 years from launch, about 20% of your base. But I was talking to ask some more quantitative
color on the monetization curve looks like? And when should we expect a JSM to become as a large arrival
the size of Jira and Confluence as a revenue contributor to the business?

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_

I can take that. The -- look, we remain incredibly excited about -- [indiscernible] and the service
management market broadly, both in terms of IT service management and enterprise service
management for all functions within the business. I think we've done a really good job at continuing to
grow that business alongside our other businesses that we have. It's always hard when your plan catchup. It's got about a decade to catch up on Jira software in the Agile and DevOps market. It certainly has
the potential to do that, and we continue to see it being our fastest growth broad market that we have.

It's also worth noting that for a lot of our customers, our strength is in the combination of the markets.
So people who buy Jira Service Management, some of them have Scott mentioned are migrating off
expensive and legacy tools, and we see increasing numbers of switch outs, which is always comforting to
see but more importantly, they're buying it because of our connection to developers in connection to the
work management market and broader connectivity across their organization.

Increasingly, you're going to see a blending of this as software and technology become the core strategic
advantage and operating and delivering on that service alongside that is incredibly important. So I think
we are very bullish on the long-term monetization of Jira Service Management and the ITSM and ESM
spaces broadly, both because of our competitive positioning as we've seen and demonstrated this quarter
and last quarter and the quarter before hand, but also because of our connectivity to the two adjacent
markets, which is strategically why we're there. in the first place. Scott may have some customer color
that you want to add on top of that?

**Scott Farquhar**
_Co-Founder, Co-CEO & Director_

Yes. I just want to remind everyone that ITSM is right in Atlassian's valley wick it really goes together with
our GI software, which is development teams and all the other products we've got there work very closely
with IT teams and increasingly so every single day. And that's something that only we deliver in this
market and we've been recognized actually over the last few months by this. We were a leader in Forrester
Wave, where we received the highest possible score for strategy. And as a company that -- we've been
doing this for a while now, but it wasn't being started with, it's really comforting to see that it were being
recognized for the unique things that we -- only we can provide in the market.

And not only is that being recognized by analysts, but key switcher stories, right? We have a lottery travel
company who've been a 15-year customer of one of our large competitors in this space. who started out
a JSM and switched away from that legacy vendor. And we see that again and again with a large logistics
provider who moved 100 agents to JSM. So we're really -- we've been strong historically in the SMB
space. That's kind of where we started. We're increasingly seeing strength in the enterprise space as well.
as well as industry analysts are recognizing us.

**Operator**

Your next question comes from Alex Zukin from Wolfe Research.


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**Aleksandr J. Zukin**
_Wolfe Research, LLC_

I want to maybe shift a little bit towards understanding the unlock in kind of the OpEx and COGS basis
post migration. If we think about elevated COGS activity, salespeople continue to be focused on migration
that start to unlock and focus on cloud and cross-sell, upsell. As well as the incremental R&D costs that
you've been kind of putting into the entire platform as you've been doing this over the last couple of
years. What's the right way to think about opportunity on kind of the operating margin side and the OpEx
portfolio as we go -- as we get even into the next few quarters?

**Joseph Binz**
_CFO & Principal Financial Officer_

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

And the other thing is more mechanical. It's we're lapping the benefit we received in H2 last year from
the restructuring and lower bonus expenses. You've heard me talk about our philosophy overall on OpEx
management. We continue to focus on maximizing the return on every dollar spent. We're focused on
making disciplined prioritization and resource allocation calls and driving operational efficiencies as we
gain scale.

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

In terms of gross margin, in general, gross margins will track with the revenue mix Cloud gross margin
structurally obviously have lower gross margin than our licensing business. So as that becomes a bigger
mix of our overall revenue, that will put pressure on gross margins blended. At the same time, the
mindset we have on cloud gross margins is to drive year over -- consistent year-over-year improvement
through the great investments we're making on the engineering side to optimize cloud infrastructure to
improve support and so again, you're right, we're going to make big investments on post sale activity to
drive deployment and usage and engagement.

And then we're going to have an opportunity to redeploy that and become more efficient over time, and
that will be part of that story. So that's the general framework on how we're thinking about both the cloud
COGS side as well as the OpEx side going forward.

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_

Alex, maybe I can just add a small bit of color from an engineering point of view. Look, philosophically, I
think all world-class engineering organizations in any large fast or SAP-type company should be working
on continuing to optimize engineering costs. as you're running -- as we are an incredibly large Cloud
platform that's now geographically diverse, as you see from all the data residency improvements and
other things. There are opportunities to save money effectively by running things more efficiently over
time.

And some of that learning comes from scale, some of that learning comes from deployment, some of
that learning comes from new technologies. We certainly have a large investment as a world-class worldleading R&D organization and continuing to do the things we did last quarter, cheaper, better, faster and
more efficiently. Sometimes that money has returned, as Joe said, in the finances. At other times, it's
invested in other things. So it might be we learn how to do things more efficiently and run systems and
services more efficiently, that then allow us to do things like that a residency in a global sense, other times
in things like Atlassian Intelligence, a lot of the AI features, it's about getting the features out first, and


-----

then working out how to cost optimize over time as we watch customer usage patterns, we can work our
head of scale and make that more efficient. So certainly something in engineering, we spend a lot of time
working on, and we've had great results over the last 2 to 3 years as our client has grown increasingly
more complex, but also that gives us more leverage.

**Operator**

Your next question comes from Brent Thill from Jefferies.

**Brent John Thill**
_Jefferies LLC, Research Division_

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

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_

Brenton, I'm glad. I can take that one. I was worried about you all not asking an AI question well into the
call. Just checking you're all updated. [indiscernible], Atlassian intelligence and AI generally is a huge
advantage for [indiscernible]. Like we deeply [indiscernible] as a company that focuses on knowledge
workers and unleashing the potential of every team, is a company that has a huge amount of data that
customers have entrusted us with, the ability to remix, summarize and give that data back in different
forms to customers using a lot of these large language models and machine learning technology is
incredible.

It's very exciting in terms of what we can deliver. As you mentioned, the initial Atlassian intelligence
feature set, largely went GA during the quarter, it has had a fantastic customer reception. There's no
other way to say that. We saw that when we announced it at Team '23 last year in Las Vegas, and we've
continued to see that as we work with all of the early access program and the beta customers and now
being in GA.

The ability to change how people do work in non-technical teams and in technical teams is just an unlock
when we talk about our mission to [indiscernible] every team. It's literally doing that in fantastical ways.
We had more than 20,000 customers that use the features during the beta period, which, for us, as far as
the beta goes is sort of off the chart in terms of interest, which is fantastic. And as you mentioned, we do
see server and increasingly more of a data center customers. It being a factor in their movement, right?
It's being a factor in their migration. There's a clear logical understanding among customers, that's the
last language model-driven and machine learning-driven features are based in the Cloud, which means
that the customers move to the cloud in order to get access to those features.

And it is another reason in a whole tapestry of reasons why customers are looking to move. And we've
certainly seen really great adoption of those features so far, really excited about Latin Intelligence. Really
excited about virtual agents and Jira Service Management continuing to just drive straight efficiencies for
customers and again, driving that movement up to premium enterprise additions as we've talked about
beforehand.

And lastly, as I mentioned earlier, Loom AI and the Loom intelligence features that we shipped last month.
again, driving great adoption of Loom because it's a different category than the other listing intelligent
features, but the ability to create and consume video more efficiently is really quite fantastic using some
of these technologies. So I don't think our excitement could be higher and our commitment and the
amount of resources we're spending in R&D to do this equal to the best in the world is paramount for us.

**Operator**

Your next question comes from Ari Terjanian from Cleveland Research.

**Ari Nareg Terjanian**


-----

_Cleveland Research Company LLC_

Strength in deferred revenue performance was notable. I was wondering if you could help unpack how
much some of the newer initiatives around step-up credits dual licensing, hybrid ELAs as well as Atlassian
Advisory services helped drive the strength in the larger enterprise deals there? And how should we think
about some of those newer programs flowing through to revenue over the coming quarters, meaning to
the extent there was dual licensing, how does that flow through to D.C. and Cloud? And similarly, advisory
services, how does that like flow through to revenue, be it showing up in other or cloud or D.C.?

**Joseph Binz**
_CFO & Principal Financial Officer_

Yes. Thanks, Ari. This is Joe. You're right. We were thrilled with our billings performance in the quarter.
It was higher than we expected and was a record for the company. As you mentioned, you see this
performance in our unearned revenue balance, which accelerated to 30% year-over-year growth.
You'll also see it in the remaining performance obligations, which increased over $1.9 billion. the
outperformance there this quarter was driven by great sales execution that we talked about earlier, and
that resulted in several large multiyear agreements.

And those are the agreements that you were referencing, hybrid ELAs, dual licensing, they're having a
material impact on our ability to grow our business in the enterprise space. I'd say the way you're going
to see that show up is primarily in the form of migrations because a lot of that is targeted at establishing
those relationships with our customers over multiple years.

Many of those customers are using data center as a stepping stone until they're ready to move to the
cloud. It shows up both in a data center and our Cloud revenue rose from a P&L accounting perspective.
And we basically attribute revenue based on the relative list price between those two. So it's roughly
50-50, give or take, between those two things as you think about the mechanical accounting of it.

**Operator**

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

**Michael Cannon-Brookes**
_Co-Founder, Co-CEO & Director_
Thanks, everyone, for joining the call today from wherever you're joining the world. We really, really
appreciate you being here. As always, also appreciate [indiscernible] questions and continued support of
Atlassian and analysis. A small note, we look forward to seeing all of you, hopefully, at Team '24 in Las
Vegas at the end of April. And with that, have a kick a*s weekend.


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