Good afternoon, 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 quarter of 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 of 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 insight and commentary for the quarter. During the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties, and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. 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 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'd like to allow as many of you to participate in Q&A as possible. To facilitate that, we'll take one question at a time. Please rejoin the queue if you have another question or follow-up, and we'll do our best to come back to you later in the session. With that, I'll turn the call over to Mike for opening remarks.
Thank you all for joining us today. As you've already read in our shareholder letter, we closed out 2022 proud of everything we've accomplished in yet another unpredictable year. Despite the current macroeconomic environment, the massive opportunities in front of us have not changed. We continue to make great strides towards our long-term goals. We're ready to execute with relentless focus in 2023. We've 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.
These are just a handful of examples. We've always prioritized putting our customers first, we're seeing customers increasingly turn to Atlassian as a trusted 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'll pass the call to the operator for Q&A.
We will now begin the question-and-answer session. If you have a question, please slowly press star followed by the one on your phone. If you'd like to withdraw from the queue, please press star followed by the two. Your first question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.
Okay. Thank you very much, good afternoon, everyone. It sounds like the macro has had no impact on migration activity so far, even though clearly you're seeing it in some other areas, you're still expecting migrations to add 10 points of cloud revenue growth this year. In an environment where customers are clearly tightening their belts, 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 will be helpful. Thank you.
Hey, Greg. This is Cameron. I'll start off with some details, and then I'll probably let Mike add some more from what he's seeing. As you already know, you know, more than two years ago, we announced the upcoming end of life of our server products. Ever since then, we've been on this migration journey, helping our on-premises customers move from both server and data center to our cloud offerings. 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 of going to our cloud, the additional benefits from a feature perspective.
From there, we've been able to get increase in our ability to get through the contractual, legal, and data privacy aspects of moving to our customers to the cloud. We've made huge strides in actually migrating their data and their users to the cloud. From there, actually onboarding their users so they understand the new experience. This obviously
Can be an extremely complex exercise. We're two years into this, and every single day that goes by, we've been getting better. I also want to recognize is that we purposely built and engineered kind of this path over this three-year timeframe using loyalty discounts, improvements in our products to allow us to provide compelling events along the way for our customers to move. 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, Greg. Look, I just wanted to say it's incredibly important in this environment to help our customers through as well. 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.
Secondly, the benefits of the platform that we've built and the integration across our products, especially as they're 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, you know, what our job is, to help them become more efficient businesses, especially in these difficult times. I think we're really well-positioned in that, in that way.
All right. 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 focus in investments on a go-forward basis. The operating margin target for the full year comes up by a little bit. 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. If you could talk to us a little bit about kind of where you're moderating investment, is there potential offsets? 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'll start. Yeah, Keith, this is Joe. I'll start, and then I'll pass it off to Scott for additional thoughts. You're right. Our overall view of H2 margins has not fundamentally changed from the prior quarter. We expect revenue growth to moderate in H2, driven by macro impacts we saw in Q2. In addition, we had some timing impact on the pull forward of OpEx savings into Q2 that won't repeat in H2, and we'll continue to invest and hire against the terrific long-term opportunities we see. Those are the primary factors. You asked about the broader work that we're 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. As I think about the work we've been doing around focus reprioritization and resource allocation, it's really included some flavor of all these things to drive the right overall business outcome. 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. I'll pass it over to Scott, if you'd like to add anything.
At the risk of repeating you, Joe, just a reminder for those that are maybe newer to the Atlassian story, back in April, we chatted with you, our investors at our investor day, and we talked about, you know, a cluster of four growth opportunities that we saw ahead of us. Those, you know, were around the cloud migrations, our ITSM opportunity to take market share there, better serving enterprise customers, and launching and growing new products that we built on, you know, the back of large investments we've made in the Atlassian platform. What we've seen, though, is that those four areas are having great returns. We've got incredible momentum in those four areas.
We've said about Atlassian, you know, in times of good and times of bad, that we think about things for the long term, and we want to invest over the long term to make the right choices, as a business to get the right returns. We continue to invest in those four areas. We're rebalancing from other areas of our portfolio into these great opportunities that we've identified and shared with you. Of course, you know, responsive to the current macro environment and our commitments on margin targets that we've given out to you.
Excellent. That's helpful. Thank you, guys.
Your next question comes from Frederick Havemeyer from Macquarie. Please go ahead.
Hi there. Thank you very much. I wanted to ask, in regards to just what you were talking about in terms of product innovation as you're investing during this period, certainly it's notable the focus on ITSM. You know, 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. Hi, 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 1 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. You know, again, we say 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 teams more efficient.
We, we really try to keep that as our north star across all of our markets. At the same time, you know, 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're able to move those resources around a little bit more fluidly than other companies may be. We continue to innovate. We have a lot of new products that we've built over the last couple of years, and we continue to work with customers in testing and things like Jira Product Discovery and Compass and Atlas, and a couple upcoming ones like Beacon that 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. 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 Smart Links or analytics running across them, is a huge advantage of the cloud. 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, I'd argue innovation doesn't just come in new product form. We continue to work on the big E enterprise aspects of our cloud in terms of scale and performance, in terms of accessibility.
As you see this roll out new data residency regions this month, and we continue to work with our customers on what regions they wanna see us data resident in. You know, things like FAFSA and HIPAA and all sorts of the acronym soup that comes with the enterprise. 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're obviously responsive to the environment that we exist in at the moment.
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 targets, 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 worsens in the second half of the fiscal year. Maybe just what those impacts are, what gets worse. The letter calls out December as especially pronounced. I'm just curious if there's anything you can say on whether those trends held consistent in January or if things are getting worse or better. You know, any color there as we're 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. 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'll also notice we've maintained a five-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've 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.
The rest of the picture is largely in line or better than three months ago. In terms of what we've seen in January, I'd say we've incorporated that into the guidance, and it's consistent with the assumptions that formulate the overall approach.
Thank you.
Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.
Hi, thank you very much. We've taken the right step in bringing down the cloud targets. I think it's happened a couple of quarters consecutively. What gives you the confidence, therefore, how can we get the confidence that we're at the point where we can assess what are our leading indicators for your cloud business, granted 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 upgrade, the forecast.
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.
This is Cameron. I'll take that one. You know, 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, clicking the try button, and signing up for free versions of our products. They're converting to paid customers. They're taking out their credit card at a slower rate than what we've seen in historic trends, and that's definitely continuing from Q1 to Q2. 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're out there and actively using the free versions of our products, and we're 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're seeing that largely it 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've seen largely the amount of customers that were downloading or downgrading from the paid plans down to our free plans. That's largely 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. We believe those are still the two headwinds that we're 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're looking at? If you have a view, that's it for me. Thank you.
Hey listen, there's plenty of variability in the business overall today. On the top of funnel, people coming to our site and converting, I feel they're very stable between Q1 and Q2. The end user growth is much harder to predict, and it'd be hard to basically say whether that's going to be leveling out or that we'll 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, you know, 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.
Sure, mate, I can take that one. Look, we maintain incredible bullishness on our position in the work management space. You know, 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 all sorts of other things we've shipped during the quarter. We're 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're 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 world already. If you're 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 it 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's evolution cycle. We're sort of a year, a year and a bit in.
You know, 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. That's why, you know, you see us investing in two things. One is the platform story, things like Smart Links that I've mentioned beforehand, analytics, automation, being able to automate across our product set is a big part of what customers are turning to Atlassian for. 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 Work 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 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. 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... you know, 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? Similarly, we picked up some anecdotes of server customers maybe wanting to wait a little bit more closer to the end of their server support date before migrating to either cloud or data center. 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 those. First and foremost, on the, you know, what did we see last quarter when it came down to SMB or our smaller customer growth versus enterprise, as we've 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 were moving from monthly down to our free tier. That was definitely the new piece of information that we saw in Q2. On the other side, our enterprise side of our business remained exceedingly strong with migrations, with cross-sell with Jira Service Management and Jira Align, as well as our addition upgrades, 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, you know, 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, we see people going from small companies into big companies and bringing the preferred tools and standards with them. 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 either data center or cloud is a multi-year journey. Obviously, the core focus there was to migrate customers to the cloud.
We are largely in line with all of our goals that we've 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're gonna lose some customers through the transition. The good news here is over the last couple of years, we've seen increasing number of customers move to data center, and you see that in the numbers, but as well as many customers staying on server for longer than we had expected. That's actually a good thing. I see that customers will continue to go all the way until February 2024 before they're gonna choose going to cloud or going to data center.
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. As I mentioned, whether the customer chooses server to data center or data center or server to cloud, all of it shows future investment within Atlassian and commitment to our products. I feel increasingly confident in our ability to get those customers to the cloud over long term regardless. Thank you.
Perfect. Maybe just a small follow-up. Cam, is it possible to Is that percentage of SMB enterprise for cloud, is that 50/50? Is it, you know, from a revenue basis, is it, you know, 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. Well, I think I'll 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. What are you seeing out there since, you know, 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 d own on new development projects, if that's what we're seeing?
Yeah. As I mentioned, the back to the one primary headwind we have seen that was different in Q2, which is user expansion within our smaller customer base. You know, 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 churning 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 software that they purchased over the last couple of years. We believe long term, you know, technology is still a major driver of growth across many different companies in many different industries, and, you know, that will only continue to grow across all geographies.
We look across our entire customer base, you know, we see it's not just the tech or engineering-focused companies, but it's in 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 of these different customer base. Long term, we believe is there gonna be more technology, more developers in the future that are gonna use our products to get their work done and collaborate with the rest of the business? Absolutely. We are set up with our multiple offerings to take advantage of that growth.
Okay. No relative difference in the decel between serving teams for software developers versus for IT versus for work, for enterprise and for business. Is that correct?
Yeah. Scott here. I'm just gonna chime in, Michael, on that one. Look, just a reminder, like we've, you know, we always started early on serving just the developer in an organization, you know, the person writing code. We've long been around, helping those developers collaborate with the rest of the organization. You know, I believe our latest number is something like a quarter of the users in Jira Software are developers writing code, and the rest of it is your product managers all the way through to designers. A lot of our benefit we get is basically coordinating the work of the broader software and technology organizations with our ITSM offering that now goes, you know, broader into the IT teams out there.
Whilst we, you know, sort of at core what we do is helping developers, like the broader problem we solve is actually how people get work done across their organizations. That's, I think, where we remain strong versus maybe point development products that are really just for developers. The other part, just to echo Cameron's, is that no one I've... You know, it's still early in the days of LACE and other things of other companies, but I haven't heard that these developers are not getting other jobs elsewhere. What I'm finding is those companies that struggled to hire developers, you know, previously are now able to pick up people where they couldn't before.
I think that, you know, further proof points that development is not, you know, and software more broadly is not going anywhere as a long-term trend. Yeah, there'll be short-term bumps up and down, like as we're seeing. I don't think we're gonna find developers sitting on, you know, 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. You know, from what we can pick up, there's a lot of customer partner excitement about the product. How do the capabilities that you've developed with JSM.
Compare 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, Todd. That's a great question. We built our ITSM solution in three areas that I, you know, remain the reasons why our customers buy it. One is it is like a consumer-like offering out there, and people will choose to use, you know, something else at the back end and install JSM at the front end because of its consumer-like offering. In some situations, in very large organizations, we find coexistence with existing solutions where we get fit in at the front end to old systems there. I guess that's just sort of, you know, proof point that's a great, you know, advantage for us.
The second is our time to value, and that time to value means that we can target, you know, the Fortune 500,000 with our solutions, whereas many of our, you know, competitors target enterprise, you know, target a much smaller subset, like you're willing to pay for the financial services in the 6-12 month, you know, onboarding and all the stuff that goes along with that. That's our second value prop. The third value prop for us is that we bring IT and development closer together, no one else can say that. Again, that's been the history of our long association with how developers work, you know, deep integration with all of their tools. Our approach to this market, you know, is a long-term one.
We're not aiming to go take the largest, you know, customers in this IT market to start with. Because if you did that, you end up with a checkbox feature delivery mechanism where you need to check every box in order to switch something out. That's not the approach we want. We want to build a product that is loved by people long term and serve the Fortune 500,000. 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, and, you know, the desire to rip out some of the core systems that those large incumbents provide. In other cases, we just don't operate in that space at all.
We're very happy with the small mid market sales that we make and the coexistence in those large areas. For us, it's a long-term gain, and we believe those three advantages will play out over time.
Yeah.
Perfect. That's very helpful.
Oh, go ahead.
Sorry. I was just gonna add a couple other items, just from our go-to-market side of the house. Obviously we've espoused the benefits of Jira Service Management for some time, but even in the last month, we've 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 maybe 10 agents at most. We are helping really get many core more of our existing customers or new customers coming in the door to start using Jira Service Management in anger at no cost whatsoever.
Of course, over time, we will continue to get them to upgrade to paid plans or move to premium versions of our products. Once again, in this downturn, we're taking advantage to capture market share. 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, replacing an 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. Jira Service Management is a massive, you know, a massive savings compared to many of the alternatives in the industry. We give a great compelling offering for customers to move to. We've 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. Taking the question. 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? What is driving the commentary for moderating data center growth in second half? Thanks.
This is Cameron again. Yeah, data center is a fantastic offering. I just have to say that, like, there's a reason people use data center. It's, you know, provides the scale, mission criticality, performance that many of our customers demand, especially many of our largest enterprise customers. As I mentioned prior, this is all about a multi-year journey away from server and to cloud and data center. We've been making cloud the primary destination for these customers, and we've been seeing those migration rates to cloud hitting very much in line with our expectations. However, many of the customers that potentially might have seen stay on server longer or potentially go to alternative solutions are choosing data center. We have seen data center continuing to be an increasing space of demand for many of our server customers in the interim.
I also need to call out that the path from server to data center is not a dead end. We 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. We see this as just a moving to data center is a great thing. It's a future investment in Atlassian. It's more commitment to our products and absolutely sets us up for future cloud migrations in years to come.
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're 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. 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. 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, guys.
Your next question comes from Ittai Kidron from Oppenheimer. Please go ahead.
Thanks. I want to go back to work management. You know, 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 find quite strange. 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're not getting the win rates that you'd like to see against the Asana and the monday.com of the world? Help me understand why such an important area of investment growth is not mentioned even once in your press release.
Yeah. Good day, mate. Ittai, Mike here. No, that wouldn't be fair to say at all. Look, I think we're incredibly bullish on work management. To your supposition there, I don't think so. I would say it's at a different point in its life cycle as a market currently to where ITSM is, which is why it assists us calling that out, particularly in the press release. There are no favorite children in Atlassian, don't worry. Atlas is doing really well, right? It's a very new product. We always say it takes, you know, two, three, four, five years to build a great product and a franchise, and we're patient long-term investors towards doing that.
Everything in work management is targeted towards the Fortune 500,000. Atlas and Jira Work Management, both of which are our newest offerings in that space, you know, it's early in their journeys. I can't say that enough, we're 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-curves of adoption work in our customer base. We are working diligently on that, and both the teams are working really hard there. Confluence, you know, continues to go from strength to strength. It's always been a shining light in the Atlassian portfolio and continues to be so.
Doesn't mean from the press release or anything else that we, you know, aren't there. Again, we continue to get analyst recommendations and plaudits in various different, you know, waves and charts and all the different bits and pieces there. We continue to get great encouragement from our customers that we are the only work management vendor at scale, and we're one of the largest scale work management vendors 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're 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? You know, that's a huge strength of ours in the area that we continue to do well from.
Very good. I appreciate it. Thank you.
Can I just chime in there, Ittai, just before we move on because one thing we tried to do, we've got so much great news at Atlassian, and one thing we try to do with our shareholder letters is focus on one of our three markets at a time. Last quarter, we focused entirely on work management. And this quarter, we chose, you know, another market. Hopefully we don't, you know, confuse you with doing that. What we really wanted to do is go deeper on 1 market at a time to, you know, help educate you, our investors.
I think that's just, you know, I want to get that across to people who, you know, maybe next quarter, maybe people will think we deep dived on something else and, but that was the intent behind it. You know, things like Forrester Wave for collaborative work highlighted we're a strong performer. You know, that was 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 Fatima Boolani from Citi. Please go ahead.
Hi, it's Fatima Boolani from Citi. That's the first time I've heard that. Thank you for taking my question. Either for Joe Binz or Cameron Deatsch, I wanted to ask a broader question about your pricing strategy. You know, we appreciate you've been very consistent and transparent with your pricing increases in the base as it relates to the server offerings and related maintenance offerings, as well as Data Center and Data Center maintenance. I'm curious to get your perspectives on what type of customer feedback you're getting, clearly because we're kind of in a different state of the market environment and the macro environment. Wanted to assess if there's maybe potential fatigue from customers in terms of the discussions you're having on this front as you take prices up.
As a related matter, as you raise the floor on the pricing on these predecessors or form factors relative to cloud, why is it that we're not necessarily seeing a more pronounced follow-through in cloud migration? Thank you.
Yeah, this is Cameron. I'm happy to talk about pricing strategy. It is a large portion of my day. Effectively, I think you, you nailed one of the key points is consistency. Largely, we've been very consistent over 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. 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.
You know, when you look to a potential alternatives that are close to the feature comparison, we are a fraction of the price of those competitors. 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 met with many of my customer-facing teams, our renewal teams and so on, to discuss, you know, how we were going to address potential customer feedback and of course, how are we going to plan and address that.
I am very happy to say that actually the price increases that we've done recently, both in October and now, actually have had no material different feedback from our customers than we've seen in previous years. 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're doing these price increases, you're doing larger price increases on your server and data center products to effectively more incentivize the customers to choose cloud. I have to say, actually, that is driving exactly what we've expected on our cloud migrations, and that's why our cloud migrations are going, driving that 10% growth that we've 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, we are thinking about data center. Well, now is a very, very good time. Let's do that before that price increase goes fully effective." We'll 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. 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.
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 detail that you've been providing on all these other questions. Going to piece together a couple of comments that you've made so far and see, number one, if I'm understanding this and what the implications might be. Correct me if I'm wrong, it sounds like more of the headcount headwinds you've been seeing are really more on the non-technical side. I think you had a good case around developers who are finding jobs easily and the strength in JSM and things like IT, you know, suggesting strength there. Correct me if I'm wrong, that's where more the headcount headwinds are on the more non-technical side.
I'm 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? What confidence do you have that, you know, after this macro, they're going to go back to having the scale of teams that they might have had before, you know, on the non-technical side that will bring back the growth on that side of the business?
Hey, this is Scott here, and I think what you're asking is, you know, hey, there was a lot of tailwind behind software, you know, over the last couple of years. What does the future look like in those areas? You know, I get confidence around Atlassian for a whole bunch of reasons. One is that, you know, software as a general category ain't going anywhere. Like it's, you know, in every area, whether it's cars or it's delivery or it's, you know, the AI, ML, you know, chat AI and stuff like that's all gonna affect every way that we live. All those innovations are going to require software developers.
There's, you know, a micro time, like, you know, yes, people rebalancing their software teams at the moment, but the long-term trend is strong that, like there's gonna be more and more people there. Two is that because Atlassian helps connect the entire organization to get work done, and we help basically move work forward across the entire organization, we are not beholden to just the R&D headcount. As companies increase all the people involved with, technical areas or non-technical areas, we are there to help them collaborate. That helps me, do well. Also, if you look at our penetration inside companies, our largest accounts, our smallest accounts, like we still have large seat, increases. Like we're very well penetrated in the organization.
I get comfort that over time, our, you know, our seats per customer will go up. We're, you know, we're not any sort of point of saturation there. Lastly, if you look at the products like our, you know, products to customer or products to a seat is still relatively low compared to the opportunity we have ahead of us. You know, we've always tried to focus on the, you know, not the things that do change, but the things that don't change over the long term, which I know Jeff Bezos talked about at Amazon. That's one thing they focus on is focus on things on investments on areas that don't change.
You know, teamwork and humans working together is a problem that's always going to exist, you know, over the long term, and that's where our investments have been. I can't predict the next, you know, 18 months of what seats look like, you know, in the broader macro economy. I look at us, and I feel we're 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 what Fatima was asking, and I was wondering if you'd 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, this is Cameron again. I'll speak to the overall, you know, how we think about the pricing strategy broadly. The idea here right now is, as you know, many of our server pricing that we have today, especially for higher tier customers, you know, above 500 users on our 2,000 user, 10,000 unlimited, there's a significant price difference between server and data center or cloud. Today, if a 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. What you've 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. If you look to our historic price changes over the last few years, you can see that we're slowly closing that gap between legacy data center pricing and our cloud list price. 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.
Mark, this is Joe. The guidance, the revenue guidance incorporates what Cam just said. We continue to assume that migrations will remain healthy. I would also say from a pricing impact on the model, just keep in mind, you know, we do have ratable recognition on subscription, which is over 80% of our revenue. The timing on the renewals that happen throughout the year, you won't see an impact when we go through those types of pricing changes. We've 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 want to double-click on some of the investments you're making around the enterprise strategy. You know, can you just give an update, what you're doing there to drive traction, maybe speak to some of the partner consolidation that's occurred recently, and if there's anything you're doing, differently there to drive further migration, and maybe speak to some of the multi-year contracts, that were called out, most recently to exit this quarter. Thank you.
Yeah. Hi, Ari. Let me take the first half of that, then I'll leave Cameron to do the second half on the multi-year contracts. From the point of view of what we are doing, we've 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 transformations as a business over the last decade, you would argue. In terms of specifically what we're doing, look, you've seen us continue to work on performance and scale. The scale offering, we've continued to move up in the cloud. We now have 35,000 users in GA and 50,000 users 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 large scales over time. It's not just the ability to handle user volume, it is about the performance that those customers get, especially in lower spec-ed 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 are long believers that if you look forward, you're going to have more governmental regulation in different countries, different geographies, different industry areas, and our platform and our infrastructure has to handle that. You saw that this quarter. We shipped to 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'll continue to add more in those areas as we build them out over time. You can see all the details in the announcements that we give over time. The third part we're working on is continuing in extensibility in the cloud. The reason that that's an enterprise concern is 'cause 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. 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 yard so they can just focus on their businesses. Cameron?
In addition to all the R&D investments we've made to better serve our enterprise customers, I am exceedingly happy and proud of what we consider our enterprise transformation on the go-to-market side of our business. We've invested heavily to get closer to our largest customers and help them through this strategic transformation to the cloud while maintaining, you know, some of the most efficient sales and marketing spend that you see in the industry. That's the balancing act that we've had over the last couple of years. You think we've 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 roadmap with our products longer term. We have things like executive advisory boards and deep dives and CIO councils.
This has actually allowed us to have, you know, 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've 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.
lastly, on the multi-year piece, it's simply the nature of larger, more strategic deals. If we're gonna go into one of the largest banks in the world or, you know, a large, you know, pharmaceutical or telecommunications firms, and we're having a conversation with the CIO about a transformation to the cloud or enabling IT service management or work management for their organizations, they are going to want a longer term commitment, and that's where you see these multi-year 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.
Thank you everyone for joining our call today. As always, we appreciate your thoughtful questions and your continued support. Thank you to all the Atlassians all over the world for your dedication and resiliency. We hope that you're able to join us next week, either in person in Berlin or virtually at our Agile and DevOps event.