Good afternoon, ladies and gentlemen. Thank you for joining Atlassian's earnings conference call for the third quarter of fiscal 2019. 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 Ian Lee, Atlassian's Head of Investor Relations. Please go ahead.
Good afternoon. Welcome to Atlassian's third quarter fiscal 2019 earnings conference call. On the call today with Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes, our Chief Financial Officer, James Beer, and our President, Jay Simons. Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our third quarter of fiscal 2019. These items are also posted on the Investor Relations section of Atlassian's website at investors.atlassian.com. On our IR website, there's also an accompanying presentation and data sheet available. We'll make some brief opening remarks. Then spend the rest of the call on Q&A. Statements made on this call include forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. 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. For further information on these and other factors that could affect the company's 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 the most recent Form 20-F and quarterly report on Form 6-K. In addition, during today's call, we will discuss non-IFRS financial measures.
These non-IFRS financial measures are in addition to, and not a substitute for, or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus the nearest IFRS equivalents, and they may be different from non-IFRS and non-GAAP measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter, and in our updated investor data sheet on our IR website. I'll now turn the call over to Scott for his brief opening remarks before we move to Q&A.
Good day, everyone. Thanks for joining today. We had another great quarter. In Q3, we achieved $309 million in revenue, up 38% year-on-year, and also generated more than $127 million of free cash flow. Last week we got to share many of our recent product innovations and announcements at one of our favorite events of the year, Atlassian Summit, our flagship user conference. This was our 12th Summit and the first time we've held it in Las Vegas. When Mike and I held our first Summit 10 years ago, we could barely attract a few hundred people, so it was both humbling and awesome to see almost 5,000 people join this year. We shared some of the biggest product announcements in our shareholder letter. There are too many to list, but just to name a few, we launched premium versions of Jira Software and Confluence in the cloud.
We shared a number of new cloud features, such as the introduction of encryption at rest and the early access launch of support for 10,000 users. We welcomed AgileCraft, the newest member of the Atlassian family, and rebranded as Jira Align. We showcased Jira Software 8.0 for server and Data Center, an even faster and more powerful version of Jira for our on-premises customers. I'd particularly like to thank those of you who were able to attend our investor session at Summit. It was great to see so many of you there in person and hear your enthusiasm for Atlassian. Both Mike and I and the team here appreciate your continued support, and we look forward to chatting again soon. With that, I'll pass to the operator for Q&A.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Gregg Moskowitz with Mizuho. Please go ahead.
Thank you very much, good afternoon, gentlemen. Just to start off, I know that you don't guide to it, but your deferred revenue did come in a fair amount lower than most people were expecting. I guess I'm just curious how you would frame the impact of prior pull forward activity on billing growth and revenue growth this quarter.
Yeah, this quarter, you're quite right. When you look at the sequence of deferred revenue, we did see a different pattern emerging. This is very much driven by what we talked about last quarter, when in Q2, we saw relatively robust deferred revenue as various customers stepped in front of the price increases that we had announced in the middle part of September last year. That drove an unusual level of activity in Q2. Of course, that activity was drawing from quarters such as Q3, and in fact, we think that we'll also draw some activity from quarters into the future as well. It was very much driven by that moving forward of activity into Q2, driven by customers reacting to price increases that were about to come into play.
Okay. Thank you, James. Just to clarify, are you seeing or have you seen any underlying changes to demand for any of your products or across any of your geos?
No, we've been pleased by the underlying strength. If you look at the subscription line, for example, reflects nice ongoing strength year-over-year, particularly right across our cloud products. Of course, the Data Center business is accounted for within that line as well, and that continues to grow as well.
Okay. Just one last quick one, if I may. Given that you closed the Opsgenie acquisition about six months ago, and significantly lowered the price points almost immediately after, I'm just curious to get your thoughts on what you've seen around demand elasticity for that product so far. Thank you.
Scott here. I'll talk about that. Look, as you mentioned, we've closed Opsgenie. That's in a space we're really excited about, a natural adjacency to the products that we have today. We've had a history of pricing our products aggressively to make sure we capture market share out there. We've done that from the very start with Jira and Confluence, and we've done that with other products since. You'll continue to see us do that. We think it's a very nascent market, and at this stage, we're after capturing market share versus maximizing any individual customer. We know that happens a lot later as you get a larger customer base.
Okay. Terrific. Thanks very much.
The next question comes from Nikolay Beliov with Bank of America. Please go ahead.
Hey, guys. Thanks for taking my question. Hey, James, just to follow up on your comment about the draw forward from 3Q and forward quarters, I would imagine the draw forward from quarters after 3Q will be significantly less than the impact in 3Q, correct?
I would expect it to be a lower impact, as each quarter goes by. Recall, when we were doing the call 90 days ago, we noted the pull-forward activity included some multi-year renewal activity. In fact, you saw that quite clearly in the sequential trend of long-term deferred revenue. There will be a tail to this feature. I would expect that as each quarter goes by, it naturally diminishes somewhat.
Got it. You announced the pricing of the premium editions, Jira Software is 2X higher than the current editions, more or less the same for Confluence. Can you describe the genesis of premium and what do you think the addressable audience is going to be for that as proportion of the business?
Hi, Nikolay. Yeah, sure. It's Mike here, I can talk to that. As our cloud offering continues to grow, as we've said, we're now past 100,000 cloud customers. You necessarily start getting more advanced customers with advanced use cases that need more specific functionality to tailor to their use case. That's really the genesis of premium. We've always tried to be very customer-led when introducing new offerings or additions, and premium is no different. As we get advanced Jira Software and Confluence customers in that 100,000 that continue to push the envelope of what they require, that's where the premium comes from. You're right about the pricing. Obviously, we've only just opened the early access program last week. More to come about how that's going. Very early days.
Thank you.
The next question comes from Ittai Kidron with Oppenheimer. Please go ahead.
Hi, guys. Couple of questions from me. First on the OpEx guidance, I guess the operating margin guidance for the next quarter. James, it implies a significant increase in OpEx. Maybe you can dig into that. What's behind this? I'm looking at last couple of years, the implied increase here is more than double what it was in the two previous years. Any color you can give us on that?
Yeah, sure. Again, last quarter, we talked about the fact that we were going to expect to see lower operating margins in the back half of the year versus those that we recorded in the front half. That was very much driven by our focus on building up our recruiting engine and, thereby, driving more new employees joining the company. In fact, that's very much what you've seen. You see that in the Q3 data that we've put out just now. We've been doing that because we very much like the opportunities that we see in front of us, particularly around the cloud platform, around our cloud products, the IT area in particular, we've talked about quite a bit over the last few calls. Of course, the data center area is another important area of investment for us, for the coming years.
That's very much playing through as we expected. Since we're doing this call 90 days ago, of course, we've also announced the acquisition of AgileCraft. When we did that, we noted that there would be some operating margin impact. We expect that to be about half a margin point in our Q4 results. Remember, of course, that that includes the effect of the deferred revenue haircut. It's not reflecting the ongoing run rate of AgileCraft because of that deferred revenue haircut. Of course, the expenses don't get haircut there. It's just the revenue side of the equation, the deferred revenue that gets haircut. It's really those things that are driving the operating margin story.
Very good. Very helpful. Just follow up on this. In 2016, in your fourth fiscal quarter of 2016 and 2017, you had a similar impact where your margins dropped in the fourth quarter, but you've rebounded fairly quickly within one to two quarters. You're pretty much back to your historical levels. Should we think about the same pattern this time around, or you think this investment cycle will be a little bit more sustained this time around?
Well, I would just say, obviously, we'll do our annual guide on the next of these calls. I'd just say that we continue to see a lot of margin leverage in the model over time.
I talked last week when we were in Las Vegas about us continuing to plan for modest levels of margin increases over time.
Got it. Very good. Good luck, guys.
Yeah, thanks.
The next question comes from Bhavan Suri with William Blair. Please go ahead.
Hey, guys. Thanks for taking my question. I guess I just want to touch sort of strategically on the approach you have with Opsgenie and Align. As you think about them, they're higher priced. Typically the strategy has been lowest price, best product. When you think about the low-touch go-to-market motion, I guess as you think about the higher priced products, do they need more hands-on selling? As you think about sort of the investment in enterprise advocates, is that part of what's going on here? Or do you think these are products that you can get away with selling virally despite the higher price point? I'm just trying to understand how that go-to-market motion works for something that's competitively priced versus things like Jira, which is still sort of substantially lower priced than competitors.
Yeah. Scott will take the first part in terms of the strategic side. Jay can talk more about the go-to-market motion. Firstly, again, Opsgenie we don't think is a high priced product. We think compared to its peers, it's very competitively priced. If you look at sort of where we're placed, like Jira is becoming or is the standard really for work across all development teams and software. Increasingly across all enterprises. When you have that, you then look at what other problems the customers have around this and how do you fulfill them. For Jira Align, that's the case that people are trying to grapple with digital transformation at large scale. They're like, "I have 1,000 people, 10,000 people.
Jira's my standard for work, I need a way of making sure that that work is tied up to the strategic objectives of the company, That's where Jira Align comes in. Opsgenie is, you find developers and Ops people these days are on call because they have to deliver cloud products and always on products, They're increasingly on call. For each of these, we look at what is the market for them and what is the customer base. In many cases, Jira Align, it will be targeted at the larger customer base. Not every one of our 100 and something thousand customers will want a Jira Align. It's only the very largest of customers, you price according to kind of the market size there. We don't have a significant change to go to market there.
I'll let Jay talk more specifically to that.
The only thing I would add is I think with Opsgenie, we land as efficiently as we do with all of the other products in the portfolio, the price point gives us kind of expansion leverage over time. The one thing that Scott didn't mention is the channel is a really important leverage point for its sales. We have 550 solution partners around the world, typically not focused on landing necessarily, but where we have landed and there's expansion opportunity either with something like Opsgenie or the rest of the portfolio, or with something like AgileCraft that's a natural expansion point from an established existing Jira Software customer at scale. The channel is basically our sales strategy, largely.
Great, Jay. Thanks. I guess just a quick follow-up on the channel. If you think about it, you look at guys like C1, Herzum, some of your larger platinum partners, you think about what they were selling or bringing to the table with Jira Service Desk, et cetera. Now, sort of you think about the greater focus with IT, I guess, how does that impact the channel partners and sort of what's been the initial feedback from them? Are they excited about sort of Opsgenie and the various pieces there versus IT, or is it a new sort of channel that you've got to sort of cultivate as you go into that, given you're a few quarters into that focus in IT?
Yeah, I mean, they're all super excited. Remember that IT has been a primary selling point for even something like Jira Software. In the Fortune 500, IT is sort of the port of call that the channel is engaging with to expand the usage of Jira Software across the business. They're super excited about things like Opsgenie and Jira Service Desk and AgileCraft. I mean, Jira Align, all the things that we're basically adding to the portfolio, I think are really meaty for them and where they're already placed to help customers expand the usage of Atlassian.
Great. Thanks for the color, guys.
The next question comes from Heather Bellini with Goldman Sachs. Please go ahead.
Thank you. I mean, I know you guys don't guide to deferred, and obviously, we're all kind of trying to guess where you're going to come in at. There was about $10 million of upside last quarter, and you guys kind of mentioned if you normalize for that's what the true number was, ex the pull forward. I guess you were talking about on the long-term deferred side there. Like this quarter, short-term deferred was impacted by $10 million versus where consensus is. I'm trying to get a sense for your comments, James, about how it's going to continue to get impacted, because aren't you having contracts that are renewing in period now that are at the higher price points?
That should be offsetting the amount of the pull forward from what's over a quarter ago now. I'm just trying to think through that impact and the offset from the higher prices.
Yeah, that's right, Heather. I mean, we're obviously now starting to see the impact of the higher prices rolling through on the server side and in the areas of the cloud business where we raised prices. Yes, there is a variety of layers to this, if you will. Just going back to something I started off the call in Q2 commenting on, this is in part why we very much focus on revenue as
Our primary top-line metric. We talked in Las Vegas about the very high recurring revenue percentage of our total revenue in the mid-80s%. The fact that predominantly our business is sold either in a one-year manner or on the cloud side now over 75% on a monthly basis. We very much look at revenue as the way to really assess our business over the long term in terms of customer-related activity. Yes, there will be some effect from deferred revenue out into the future, but that will subside as each quarter goes by.
Is there any clarity you could help give us just so we can try and minimize or help us think about the sequential impact on deferred revenue for the June quarter, parsing your comments that there's still going to be a slight headwind? I don't think any of us want to try and set a high bar for you guys, but it's hard without any more clarity than just some of the phrasings that you're using. I'm also looking at the fact that you guys also have a relatively, if you look your billings comp next quarter, I think it's harder.
Yeah.
When we think about the billings growth rate.
Heather, I would just give out that obviously we've guided revenue. Then on the deferred revenue side, I think if you look at both the sequential trend last year and then this year for both short-term and long-term deferred revenue, you can see the additional pull-forward activity that happened in fiscal 2019 versus in fiscal 2018. So I think while there are a variety of these overlapping type issues that drive the end result, I think that gives you some sense as to how things will play out.
Just to be clear, if we look at last year in Q4, you had a 10% sequential growth rate on your short-term deferred and 7% for long-term. You've been running below the seasonality that you posted last year. Are you saying we should assume that you continue to run below your seasonality in Q4? Does that normalize then in fiscal 2020? Should we think about it that way?
Well, I'll just try one last comment on this. I would describe the pull-forward activity that occurred in this fiscal year as greater than that that occurred in the previous fiscal year. So, again, you can get a pretty reasonable sense of that by looking at the sequential trend in deferred revenue.
Okay.
I think I'll just leave it at that.
Okay. Thank you.
The next question comes from Michael Turrin with Raymond James. Please go ahead.
Hey, guys. I think this comes back to Bhavan's question a bit. When you talked about the increased pace of hiring, how much of that is also an increased pace on the sales side? You talked about having 25 enterprise advocates at this point. I think you had 19 a little over a year and a half ago. For whatever reason, whether because of more complex sales, more sales up towards IT and top management, is that driving an acceleration in sales headcount growth as well?
Hey, Michael Turrin. It's Jay Simons. Not materially. It's nominal hiring in the enterprise advocate group. There's other hiring that we do in our field operations group to support the channel, which is where we get most of our sales leverage.
Okay. Just one quick one for James Beer. You talked about that increase in duration last quarter, logical as part of the pull-forward dynamic. Is there any of that still going on that survived past the pull forward that was primarily last quarter, prior quarter?
The pull forward occurred in Q2 and not in Q3.
Right. In other words, did duration go back down again from your perspective?
Yeah.
That was completely associated with the pull forward. Was there anything remaining there?
Yeah, no, we very much reverted to normal course activity now that that pull-forward activity of Q2 is behind.
Okay. Thanks very much, guys.
The next question comes from Derrick Wood with Cowen. Please go ahead.
Great. Thanks. I had a question on geographic growth. It looks like sequential growth in EMEA and APAC was lower than in Americas, which Americas looked quite strong. EMEA did, they had a bigger quarter in December. Maybe there's more pull-forward effects there. Could you speak to some of the dynamics going on internationally and why maybe that EMEA number has been more volatile and America has just been smoother?
Yeah. The EMEA growth rates I think you can track very much along to this pull-forward point that we've been discussing because it was there that we have about half of our channel partners, and those channel partners were very organized, anticipating the price increase announcements that came in September of 2018. They were an important part of how that whole pull-forward dynamic played out. Therefore, the EMEA growth rate in Q2 is very strong, and you're seeing a smaller growth rate in Q3 because of that activity being pulled forward.
Okay. In the shareholder letter, you talked about half the attendees at Atlassian Summit were from IT. I'm just curious, would you say that's been driven by the Opsgenie acquisition, or is it more increase in interest in core products like Jira Ops and Jira Service Desk? I guess as a follow-up, when you do land in IT, do you see any difference in deal sizes versus landing in developer products? Thanks.
Yeah. Good day, mate. It's Mike. I can take that. Look, I wouldn't say it's driven by the Opsgenie acquisition, although obviously that helps accelerate things. Landing in IT is something we've been doing for 10, 15 years, depending on where the software team is. As we've continued to broaden out, Service Desk is probably, what, four or five years old now. Confluence has landed very solidly in IT teams for well over a decade. It's just continued momentum behind that.
We are increasingly seen as a partner to IT at an uber brand level, at the Atlassian level, in the ways that we help IT in lots of different scenarios, whether that be managing their documentation needs in Confluence across to all of the ESM needs that Service Desk can help them with, obviously then including DevOps and the continued movements there with Opsgenie and other things. Obviously, Jira Software and Jira Core being pretty key pieces of how IT can run all sorts of processes. I'd say it's just a continued rise. There's no massive change in that focus with Opsgenie.
Okay. Any comment on deal sizes difference with landing with IT versus a software developer-led deal?
No comment on deal sizes being materially different, no.
Okay. All right, thank you.
The next question comes from Keith Bachman with Bank of Montreal. Please go ahead.
Hi. Thank you very much. I had one question and a clarification, if I could. The question relates to the Cloud Premium available for Jira Software and Confluence. Assuming that the premium notion gets spread into other categories, does this, you think, lessen the impact of price changes? What I mean by that is really, A, Atlassian's benefited from price increases, I think, over the past years. In other words, it's been an inelastic pricing curve. Does it, B, perhaps lessen the impact of the pull forwards and whatnot that you experienced last quarter and the reverse of that? I'm just trying to understand philosophically the notion of increasing the premium SKUs, if you will. Do you think it creates less upside in aggregate to the revenue line item and/or impact to what we'd characterize as seasonality surrounding the price increases?
I have a quick follow-up.
Yeah. Thanks, Keith. Look, it's worth noting we already have Bitbucket Premium and have had for, I believe, a year or more on the Bitbucket side of things. Obviously Trello and Opsgenie both have addition-based pricing. In a way, Jira Software and Confluence are just coming into line with other things we already have, and obviously have learned from and understand how those additions' pricing works in the cloud. Philosophically, it's no different than our long history of, I guess, price optimization. Again, I'd say philosophically, we always like to deliver usage before value. We like to make sure that customers use a product first and then purchase it second. That's no different with the premium editions and no different with the cloud.
We obviously know a lot more about the customer base in the cloud, so can be more precise with our pricing and pricing movements, I suppose. At the same time, you've seen us, as we talked about at the Analyst Day last week, reducing a lot of prices at the same time. For example, Opsgenie and Jira Service Desk, where we believe the market size is still significantly larger than where we are, and we have a much larger opportunity than perhaps our competitors view the market size as. We just continue to be thoughtful about pricing.
Okay. Fair enough. Thank you. My quick follow-up is on Align. Obviously, last week, there seemed to be a lot of interest in Align from your customers and partners and even investors. I just wondered if you could give us any directional barometers about how we should be thinking about the revenue impact. You've done that before with Trello, and I understand there's a lot of deferred write-off, but it's just hard to understand how we should think about the impact, even if we just look at the next fiscal year. Is there any categorization or growth rates or dollar potential ranges of impact that you could give us to help us tune our models a bit?
Well, we've noted that for the current quarter, Q4, we'd expect about $1 million to $2 million of revenue from AgileCraft, and that's, of course, after the effects of the deferred revenue haircut. That haircut effect stays in place for three to four quarters directionally. Obviously, we are excited about the market there. We feel as though it has a lot of potential for us to continue to build out our impact to particularly larger organizations. We're not offering a particular steer on the AgileCraft or Jira Align revenue for fiscal 2020.
Okay. All right. Thank you.
The next question comes from John DiFucci with Jefferies. Please go ahead.
Thank you. Most of my question's been asked. Just a quick follow-up to that, to Keith. I guess, James, you said that AgileCraft was going to be dilutive to margins by 50 basis points this year, and I think you said that for fiscal 2020, that it was also going to have a dilutive impact. Could you give us any help with that? Would it be more dilutive or less dilutive than the 50 basis points? It really would depend about how much investment you're going to do over time. I realize that.
Yeah, sure. As you point out, we noted when we announced AgileCraft that we would see non-IFRS operating margin dilution in fiscal 2020. Obviously, again, that deferred revenue impact starts to trail away once you get into the back half of fiscal 2020. If you look and contrast that with the non-IFRS operating margin impact that it has on Q4 of this year, I would certainly be expecting that headwind to subside as the quarters of fiscal 2020 go by.
Okay. That's very clear. Thank you very much.
Okay.
The next question comes from Keith Weiss with Morgan Stanley. Please go ahead.
Excellent. Thank you guys for taking the question. I think most of my questions have been asked, but I guess on the theme of acquisitions. For Opsgenie, it's been six months on board already. Any kind of indications you could give us on how it's been tracking versus your expectations? I'm assuming you're not going to give us a revenue number of what the contribution or the user number of the contribution is, but any sense you can give us on how that's started to ramp up in terms of contribution into the results?
Keith, Scott here. I'll take that one. It's been six months, as you pointed out. We're pretty proud. At the Summit, we launched the integration with user management. That allows us to flow users from one product to the other seamlessly. We've just announced that we've unified the UI. That makes it a lot easier for users to move from one to the other and maintain their mental context of where they are. Those things only happened last week. Ahead of those things, the Atlassian brand, the pricing changes, and other things we've done inside Opsgenie have materially improved their run rate as a stand-alone company. We're really happy with how that's playing out, and we expect it to further improve as we bring them into the product set.
Got it. Then maybe one follow-up for James. Understanding that M&A is a big part of the operating margin pressure that you guys see in the forward quarter. Like you're saying, you have stepped up hiring a lot. Can you give us any kind of visibility or any kind of granularity into what are some of the core areas of hiring? What are the core areas of investment you guys have that's taking place in Q3 and into Q4?
Yeah. The focus around our hiring is largely in the R&D side. I talked about our focused investments in the cloud platform and our cloud products in particular. The office that is growing the fastest is the Bengaluru office. Really, that's the primary focus is the R&D area.
Got it. That's super helpful. Thank you so much.
The next question comes from Gray Powell with Deutsche Bank. Please go ahead.
Great. Thanks for taking the question. Maybe on the product side. At the Analyst Day, you flagged 7,500 server customers that have over 500 users that could be candidates for the data center offering. I'm just curious, what's the normal catalyst for a customer to upgrade, and how fast do you think you could convert those customers?
Yeah. Hey, Gray, this is Jay. The 7,500 were server customers that had at least one product with over 500 users of server. That didn't include the cloud population. What we clarified in that slide is that is a population that continues to grow, by the way, that we can upgrade to Data Center and try to upgrade to Data Center. That is also the same population that will potentially move over to the cloud and cloud premium that we announced at Summit. There's two upgrade paths from just the standard server that they're using. The upgrade path to Data Center from server tends to be the message around Data Center. There's a bunch of features that are built to support large mission-critical scaled usage of the products.
Better performance, better reliability, an architecture that allows the proxy to be deployed in a high availability, fault-tolerant way, then additional capabilities for administrators to do upgrades without bringing the system down. If you're supporting 500 employees that use it every minute of every day, those kinds of capabilities are worth upgrading for. Naturally, if you upgrade to cloud, you get a bunch of those things provided as part of the cloud service.
Got it. Okay. Thank you very much.
The next question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.
Hey, guys. Thanks for taking my questions. Mostly going to be follow-ups on earlier questions. First, James, wanted to clarify your earlier comments on the OpEx and operating margin side. It sounds like excluding AgileCraft, your margin guidance and OpEx guidance for the year would've been consistent with what you guided on the previous earnings call. Is that a fair statement?
That is correct.
Okay, thanks. That's helpful. Then on the EMEA side, I know we talked about the channel partners and some pulling forward of deals. Were there any other factors for why EMEA was flat or even slightly down sequentially? Were there any macro factors? Was there FX that drove that?
No. Nothing material.
Okay, thanks. Turning to the Cloud Premium SKU, just wanted to go into what the addressable portion of the customer base looks like. If there's round numbers, 100,000 Cloud customers, what proportion of those are addressable for a conversion from Cloud to Cloud Premium SKU?
Yeah, mate, obviously It's Mike here, sorry, Rishi. We're obviously bullish about Cloud Premium and its prospects. We are not disclosing what we think the proportion would be at the moment. Also it's a bit of a learning exercise for us. Obviously, we believe there's strong customer demand there for the offering among those advanced teams. It's worth noting that premium is not necessarily about large customers as much as advanced users, advanced teams. You can be a 50-user Cloud customer and need these capabilities, and you can be a 500-user Cloud customer and not use these capabilities because your usage of the product is not at that advanced level yet. We have to learn those levels a little bit ourselves. Obviously, we've done a lot of research to release these, a lot of customer testing, and we're bullish about the prospects for both.
Got it. Thanks. Last one for me, and I'll jump out. Going back to AgileCraft and the margin impact, I guess mainly, I understand there's accounting treatment with deferred revenue write-down. Should there be a similar impact on the cash flow margin front as we're seeing on the non-IFRS operating margin front? I think more importantly, would that same dynamic play out next year? Thanks.
You would obviously get a different dynamic around the cash flow margin as opposed to the accounting margin. The accounting margin is significantly impacted by this deferred revenue haircut that we've been talking about. Now, it's early, obviously, in the growth of AgileCraft, and we have very robust margins at Atlassian. The focus here, I think, is on the market opportunity, the scale of it. I'll just note how in Q4 here, we're guiding to an increased free cash flow amount. We've moved that guide up by $15 million at both the north and south end of the range.
Got it. Thank you so much.
The next question comes from Pat Walravens with JMP Securities. Please go ahead.
Oh, great. Thank you. I guess I have two questions related to the acquisitions. The first one is, when you acquire a company like AgileCraft or Opsgenie that had traditional salespeople, what do you do with them in the integration going forward? Do they remain in that role, or do you transition them to something else?
Hey, Pat, it's Jay. In both cases, they had relatively small sales teams. In Opsgenie's case, the sales function worked very similar to the enterprise advocate function, where we're landing with Opsgenie, with the efficiency that's very similar to Atlassian, then we have direct teams and our channel that can focus on expanding that customer up through premium and more valuable versions to both the customer and to us of the product that they've chosen. AgileCraft's a little different, where they have a small sales team. They focus on larger accounts. The way that we'll scale the sales coverage is, again, through the channel. Most of the channel is already implanted in our largest customers because they've supported the expansion of Jira Software, which is kind of the bedrock data source that feeds into Jira Align AgileCraft once customers take that.
That's basically where we're going to get a lot of leverage in continuing to grow and expanding their business.
All right. That's great. Thanks, Jay. I think the follow-up will be for you, too. As we were walking around and talking to the solutions consultants and people at the conference, there was a lot of excitement about Opsgenie in particular. When you drill down on it, I would say the knowledge base isn't there yet for a lot of those solutions consultants. How do you educate them?
How do we educate the partners?
Yeah, your partners about Opsgenie.
Yeah. We have an enablement organization that basically focuses on equipping the channel with education on what the products do and material to help them sell. We co-market with them through a development fund. That's sort of ongoing. We have a twice a year, relatively large channel kickoffs, channel field events, both in Europe and in the U.S., to kind of galvanize the channel around the biggest opportunities for us and for them.
Do you feel like you're there, or does that take a while?
It's ongoing. Summit is also a big activation point for a lot of the channel because most of our largest and most active channel partners are there in the expo hall. You probably talked to a bunch of them. We actually had Partner Day that preceded Summit, which is a big rallying point for all the things that we want them to focus on over the next six months.
All right, great. Thanks very much.
Again, if you have a question, please press star then one. The next question comes from Jonathan Kees with Summit Insights Group. Please go ahead.
Great. Thanks for taking my questions. I just wanted to ask about the segmentation for the products, specifically the marketplace. It grew 36% in the quarter. I guess that's part of a trend I've been noticing in my model here, that it's been decelerating. This is the first quarter in which it's actually growing not as fast as the company average. I'm kind of surprised because at Summit, there was a lot of apps there that were on display, as well as a couple quarters ago, you announced a lot of apps that were going to be made available for the data center. Just trying to understand there in terms of, is this just part of just an overall trend, or is there just less promotion going on, or what's going on with that?
No, we continue to be very pleased with the marketplace. It's an important part of our overall ecosystem. Remember that, again, in Q2, we talked about the fact that there was some pull-forward activity around marketplace or other revenue, because when we take our portion of an app vendor's sale, that drops immediately into the other revenue line, because we don't have any ongoing obligation to deliver. You have that immediate revenue recognition. That was another illustration of this pull forward topic that we've been talking about on this call.
Okay. All right. In terms of the growth rate, it sounds like you're still pleased with it and just will be up and down, especially around where there's pull-throughs for pricing increases.
I think that's a reasonable way to think about it, yeah.
Okay. All right. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Mike Cannon-Brookes for any closing remarks.
Thanks, everyone. Thanks very much for joining our call today. We truly appreciate your time and look forward to keeping you updated.