Atlassian Corporation (TEAM) Earnings Call Transcript & Summary

Yes, Fatima, I can chime in. Always very perceptive of you are. Credit for the question. Let me explain why. So yes, so in Rovo, you get 20 agents out of the box at the moment. We're committing to delivering at least 20 drivers, as we tried to explain on the slides. And it's an incredibly -- it's our most complex product to try to explain to customers in a singular launch. So we'll be doing that. You can see over time to continue to do the education with the customer base. You get 20 agents out of the box. Those are agents we've built that we use and that you can customize for your organization in very simple ways. Usually, that's about giving it different types of knowledge. So the comms crafter that I explained in terms of branding guidelines, you can give it investment compliant guidelines. You can give it any basically knowledge and it will help you tailor creating of content. That's one agent that you choose what sort of process guide do you want to give it, branding guidelines is just one of many examples that teams could use that agent for and they can make 20 of those bad number choice. They can make 12 of those internally if they want, right? And that's one agent that they can make copies of effectively with no code. They can build their own. So the marketplace agent, the middle column that we tried to explain, we have built a number of agents internally that we're not shipping to customers that we built for our own business processes and everything else, just to make ourselves faster literally. Those are built either with Forge, if you want to write code and do a really advanced computations and other things, or you can build those entirely with no code. So if you go to the boost, you'll see a few examples, the decision Director and others that are quite complicated agents that are built entirely with no code by product managers and marketers and other business people inside an organization. Our goal with those is to be able to achieve real functional improvement of your business processes with someone who's smart enough to write Excel functions. That's kind of our guide of like the hacker maker. They're not a software engineer, but they understand how kind of Excel works. It's like quite a complex piece of software actually. The reason I bring up that column of making your own, we know there are a lot of customers will make a lot. Again, we've made a couple of hundred internally already in like the last 3 or 4 months. Our partners are very excited, and I suspect going also early access is, we've given a few of them about their ability to go into customers and not just write add-ons for the customers. These are the technology partners, if you like, not just to write add-ons for customers, but to build agents for customers, right? Not just to write automation rules for customers, but to build agents for those customers. There'll be for specific business processes, and I would suspect there's a consulting opportunity. That's a really big thing. I have to understand your business as a consultant. I have to understand the Atlassian technical frameworks, Forge, various other things, and then build you a unique application that runs in the Atlassian service area that solve specific business problems for your organization, whether you're making cars or fashion or whatever it is, you have a particular thing that you want to do. That is a big opportunity, I believe, for our marketplace over time as Rovo rolls out, depending on its customer base, et cetera. The third category of marketplace add-ons, you need to be a Rovo customer. So you can think Rovo is coming with a whole series of things. One of them is the agent framework and 20 agents. The marketplace add-ons that you can download come from our marketplace partners, our vendors, the people on the show floor with boots. Those can be paid or unpaid. So you have to buy that marketplace add-on or app on top of Rovo if that's a paid app from that partner. A lot of them are free, some of them are paid, and that will have its own economic model, obviously, out there. I would expect, and this is total prognostication, we've got about 10 to 50 partners working with us. They're all super excited. Most of them right now have ideas what they would like to build. Realistically, what they're building is taking their existing apps and adding agents to them, right? So a marketplace partner that already has an app doing task X can now just do task X and add agents to do it. So you can chat to task X. You can interact in various different ways. You can certainly have it appear as a person in various places. That's fine, right? That's an additive kind of experience. It will probably take a little while until they're building entirely new agents that are purely just a paid agent that does something specific. But all of that is a potential possibility of surface area with Rovo, but we still obviously got a ton of work to do to get there. But yes, you've sort of now the various economic possibilities of different agents for us.

We'll go to Luv.

Luv Sodha, Jefferies. I wanted to ask the first one. I think a key concern has been around the sustainability of the growth. And so outside of these three big products that you have today, which one out of the broader portfolio set do you think could become the next product, if you will, that becomes -- grows at that scale? And then secondarily, a question for Anu on R&D, just walk us through the priorities for the next few years. Obviously, the past 3.5 years, Cloud has been a big focus, right? But what's coming in the future, I guess, in terms of investment there?

Sure. I can take a shot on both questions and maybe Mike can -- so the thing about newer sources of revenue like we broke out, is that one, the three core products themselves have different levers of revenue. So it's not just selling the three products to different customers, but it's around expansion, what new use cases are we able to serve, which is why we talked about Jira Work Management and Jira Software getting together today. Just yesterday, I spoke with an analyst that was really thrilled with the unification message. It's quite the opposite of the first question we received, which was they hear clearly in market that Jira Work Management is seeing the kind of breadth of adoption that they're not seeing with any other vendor. So they're really excited about taking the core act of Jira and being able to sell it wall-to-wall to a lot more different kinds of teams than they've traditionally sold to. So the opportunity within the three products, I would delineate that as it's not just one linear path, but really the ability to address different kinds of audiences with different kinds of additions as well in cloud. So that's one thing that we have continually invested in, which helps us drive more sustainable growth in the core products. In addition to that, the way we think about other sources of revenue really is the continual product innovation engine that we have with what we talked to you about over the last few years is point a. We've put out a lot of stats around how Compass has grown, how Jira product discovery has grown. And we continue to run that from an R&D perspective with a very high level of discipline around. We will see multiple ideas, and ideas that look like they're getting good traction that are seeing product market fit. We then fuel those further so that they can take off into different places. So when we talk about the system of work, that really gives you a solid idea of what are the different radial directions in which we can grow revenue. And the teamwork foundations, which are our three core products, but now we have Loom joining the teamwork foundation, which is another universal product that really serves different kinds of teams and has a tremendous potential going wall-to-wall across different kinds of teams. Also, a universal use case just like we have with Jira and Confluence. And on top of that specialized collection. So Compass has seen phenomenal customer interest and adoption. So has Jira Product Discovery also rapid grower. And because of our strong investment in platform, which is a consistent thing that we have made year over year, it allows us to create even more such new sources of revenue. And lastly, in the platform itself, we are able to create things like what Mike talked about in Rovo, not just as a first-party source of revenue, but potentially in outer concentric circles of second party and third-party sources of revenue such that we build an entire system. So it's mostly revenue sources that we think about as a matrix, not just as one linear thing saying, oh, here's a list of revenue creators for us. Your second question around how do we think about that on R&D. Typically, in R&D, we invest a little ahead of time to create future sources of growth. And we've been talking to you consistently about how we've invested in the cloud platform so that we can bring server customers over to cloud, and that has worked very well. So as we see more of the migration work crest, effectively, what we're doing is we've already redirected some of that work into enterprise readiness, which is how we are able to make all of the deliveries around data management, enterprise performance, scale, which lets us bring more of the data center customers, larger enterprise customers over on cloud. So a big priority for us is enterprise and we invest in enterprise scale readiness at the platform level. So we see that benefit across all of our products. A second big investment area is around AI. We talked a lot about that, so I'm not going to go into a lot of detail, except that the one thing that I would like to repeatedly underline there is we have a very unique set of data, a unique set of connected data within the Atlassian ecosystem. So we are going to be able to do something a lot more unique and differentiated than any other vendor can do. And we are seeing more strength in that area with breadth of adoption of different teams. So that graph underlying our product set is getting stronger and stronger. So that's a great virtuous loop for us. And therefore, that's an area that we will continue to invest in and experimentally what are different kinds of sources we can create. And lastly, the investment in platform, I often get this from investors around hey "When will it stop?" The way we think about it is not that it's a finite start-stop, but more around how can we keep redirecting it to different areas of the platform such that we can lift all boats, such that we can lift all of the different products built on top of the platform. And you continually see proof points of how that is helping us create new sources of doing.

If I can just add on one small thing. I just want to connect sort of two of the new thoughts. You've seen us have a -- well, at least almost a decade as a public company, 2 decades as a private company, history of balancing durable growth with balanced profitability, right? We've always been incredibly capital efficient. We continue to be so, I think, and durable growth. One of the reasons that comes is making great products, but taking the time to make them properly, right? I had someone asked me how come it took 2 years for Jira Product Discovery to kind of get out of point a. And the answer is because we wanted to make it great. We wanted to make it really work with customers because part of the flywheel business model and everything else that we have is the product has to start by being really good, right? I would argue with both Jira Product Discovery and Compass. They have reached that point of customers saying, I want this, right? One of the pieces of customer feedback I got or internal feedback of our customers was people showing up to the Compass booth yesterday and saying, "My developers have told me that I need to come and ask you about Compass. What is it?" I'm like, awesome question. That's not a negative question. That's a super positive question. That is literally the question that we spent 2 years plus [indiscernible] over the 18 months because that's the durable growth. That's the customer that will come, and they will buy Compass over the next 12 months and start in a small way and then they will grow over the next 4, 5, 6 years in a durable way alongside Jira and other things. That is by design, how we want to be. We want to be durable in that growth path for that customer. I love that question. But we do take time to make sure the products are great when we ship them.

We have time for just one quick one. Jason?

Thanks for fitting me in. I think, Scott, you said something interesting about the mid-market or ITSM and now it's still quite fragmented. I hope you don't take this the wrong way, but what might investors not fully appreciate about maybe being the #2 player in ITSM? Or what do you think is underappreciated about that market?

That market, for us -- like the ITSM market for us, it's just super exciting because we're winning market share in every front there. And I do believe the reasons we're winning are very, very durable reasons to win. We, in some cases, have a price advantage. Like in some cases, a significant price advantage over incumbents to the point where in a pay for itself to migrate to our products like in 6 months, 3 months, 9 months, like the ROI is there. We're much more usable than the competitive products out there. If you go talk to users of either our products, they'll tell you, hands down, why our products are way easier to use. Three is that we're tied to development. And when you talk to our customers, they say, well, why do you use Atlassian? Well, only Atlassian can actually tie action requests to solving them. And no one wants to just collect customer ticket, they want to actually solve them and solve things on behalf of their customers. And increasingly, that's software problem. It's development problems, technology problem, Atlassian can connect to those ones. And so we see things like, hey, we used to use as a third-party vendor, but all we did was then copy the request into Jira. And wow, we can do that much better if we're using the same product. And lastly, the platform that we've built out, like I showed some stuff this morning around automation. Now other vendors can build all that stuff out. But because we are amortizing those instruments in AI, analytics, automation, Forge is a technology platform, all these things come for free, free at it's been a huge amount of investment, but effectively, you can amortize that investment across all of our products. And so you see in the ITSM market, our feature and functionality is significantly elevated compared to competitors. And again, we can deliver that much more efficiently and like it's much more durable. It's very hard for competitors to catch up. So super bullish about that. And again, I don't hear as customers moving off that product. I feel -- I hear a lot of customers moving from other products to us. So I feel very good about that.

And maybe a quick one to add to that. The way you asked the question. Often we get asked the question around service management as purely IT service management. But the way that Jira Work Management works really is it creates new opportunity. You heard back from the Rivian folks around how the previous tools that the display wasn't a large legacy vendor necessarily, but it was Excel sheets and e-mail. So we also serve a long tail of use cases that are adjacent to IT, and it's more of a patient monetization model where it surrounds all the breadth of different teams and then also enters into IT. So we have that bidirectional advantage that other players don't.

All right. I think we're going to jump into a video, and then we'll move you on to Section 3. Thanks. [Break]

All right. So happy to jump into questions. Actually, Anu was mentioning to me that Jackie had a question for her, and it's relevant to bring up with the broader audience. I don't know where Jackie's sitting. Jackie, do you want to ask a question?

Super sorry to see, Scott moving on, though, I know at some point, this was going to happen, but would really love for you all to walk us through kind of how the management team will be taking over his responsibilities and kind of how you expect things to work going from here?

If you don't know, I'm leaving Atlassian then this could be very awkward. So yes, after 23 years, I'm going to hang with my family. I have a young family. Actually, my son's 11th birthday is today, I discussed over phone with him. And I'm super excited to be able to be in a position to do this because Atlassian, I feel, is in such a solid position and on so many different fronts. We've finished Server into support, which is a huge project that we've done, and we executed that as close to 4 as anything we've ever done at Atlassian, we spent a decade building out a cloud platform. And that cloud platform is now seeing that sort of momentum in feature delivery, whether that's new products like our point -- products, getting real kind of growth on revenue and usage, whether that things like delivery data residency now pretty quickly or the pace of the AI features that we could deliver. We've played a platform to pay a stage where we're really getting ROI on that. And I can tell you that, that is a huge investment under the curve before you start seeing that turnaround. The TAM work that we -- I shared earlier in terms of the opportunity we have ahead of us, particularly in enterprise I could go on. But -- so for me, it feels like a perfect time to be able to pass the baton. And as much as I'd love to say, well, Atlassian is going to be totally different with me gone, that would be great for my ego. At a practical level, Mike and I have made decisions together for the 23 years we've been working together. And those decisions are everything from which markets to enter back when we decided to enter the ITSM market, we made that decision jointly, all way through to what is our growth profile going to look like, what do we want our margin profile to be going forward. And so all those decisions are made jointly over a long period of time. And so I don't expect there to be significant changes like with me stepping down. But of course, Mike, you can talk a bit more.

Sure. So many ways to address this question, I suppose. Firstly, I told someone yesterday that we're heading into this new phase with sadness and happiness, but no fear, right? And they said, "What do you mean by that?" I said, "Well, we start by being all very sad that Scott won't be around, right?" Just on a human personal level, I think that's been the biggest overriding filling from the company. It's just man, not that anything is going to change or be different, but just a sense of sadness. It's a natural human emotion, right? After 23 years to me, 30-odd years almost in terms of interactions, although it's not like he's dying. So that 30 years continues, I guess. I've known him for 40 years and 10 years' time, that part will continue. But the 23 years as an operating executive with Atlassian, if you want to call it that way, there's a sadness, right? And that's around the company, and that's a totally normal thing, right? We have many, many employees who've been around for more than 10 years. I think the happiness is the happiness for him. He's making a great choice, leaving Atlassian in a fantastic position, bullish about where we are and that happiness feeling is mixed with the sadness, but it's a balance. The note here is like I don't think we have any fear that Atlassian is going to be a different place. We're going to have suddenly different culture or values or a mission or our strategies. We're really well set up for the long term. We make long term pragmatic, thoughtful decisions. We will continue to do that as a philosophy. But we are well set up in the current period to go and do that. We know exactly what our priorities are. And I think that sort of balance of emotions. And then I think from more of that point of view, just a thanks, a gratitude, right, to 11,000 Atlassians that their overriding feeling should be gratitude and thanks for Scott being a major contributor, the arguably major contributor to getting Atlassian to this point over the last 23 years. And all the things that we take for granted inside the company, small things all the way through the big things, he's had his hands and fingerprints on creating and his expectation is that those type of things continue, right, whether that's the values or whether that's our other things. So I don't know if that helps from a human point of view. From a practical operational pragmatic point of view. I know a lot of you very well, like the human stuff, yes, I get it. Now let's get to the operational details. As I've said to the company, any person who's job is changing his mind, right? It's actually quite simple. I've never not felt 100% accountability for the company. I suspect Scott has never felt 100% accountability for the company, right? It's not like we sort of felt responsible for 50% of things. The biggest change in my job is taking on go-to-market, right? Well, I built and ran that for 13 years. So I feel very comfortable to be able to take on sales and marketing, customer success and all the functions that we have there. So we've both been intimately involved in finance and intimately involved in talent, whether that's recruiting, team anywhere, whether that's our culture and workplace experience. These are areas that are probably some of the most shed areas in terms of the culture of the company over time. So from a comfort level, I feel extremely confident. I know you're going to wait and see the results. That's totally fair. That's what I would expect. From an executive team point of view, we have the most experienced exec team we've ever had, right? We have incredible average Atlassian tenure. We have great experience in the enterprise market as a broad whole of their careers. So I think the exec team feel very confident. I mean these two can speak to themselves, only two of them on stage at the moment. But we feel very confident we can continue to take Atlassian to better and better places over time. If the exec...

That's fair at the moment. That's true.

Let's start with [ Arjun ] on my left.

[ BK ] is actually quite accomplished triathlete. So it's good to see you jogging down the aisle BK. Well done.

Two questions, maybe if I can. One, to start off with, when you think about the opportunity to expand within your customer base and the 20% medium-term CAGR that you've laid out, how much of that is predicated on seat expansion maybe coming back versus the maybe bigger cross-sell opportunity that you have with the product breadth of the platform now? And then two, I'm just curious how you think, from a product perspective, broadly about verticalization and whether there is an opportunity to do that, whether it's JSM or Jira or other products that you have in your portfolio?

Yes, great question. Let me start with the first one. In terms of the 20% CAGR or greater than 20% CAGR that we expect, that doesn't assume any improvement in macro. So from that perspective, I just want to be clear that it kind of assumes stable macro conditions to what we see today. We do expect that we can inflect paid seat expansion for all the reasons Anu talked about earlier, it's the ability to position our products to apply and relate to broader teams in the organization. It's the penetration in enterprise, and it's really positioning us to address more wall-to-wall opportunity than we have in the past. We believe that's going to be the fundamental driver of improvement on paid seat expansion and both on the Cloud and in Data Center.

Yes. And in terms of the verticalization question on product, the way we think about our portfolio of products is through the system of [ work ] that we talked about. So the teamwork foundations has a universal set of products that we believe has -- have the potential to go wall-to-wall across every organization. And we're seeing several proof points of that with customers today taking these products wall-to-wall. So I would think of that as we have a set of universal products that every single team in your organization can consume. And we build on top of that foundation. So the verticals that we think about on top of that foundation for specialized teams, the ones that Scott talked to in his keynote today, specifically for software development teams, for IT teams, for service management teams. And I think we will continue to look at what are those adjacent verticals that we can keep building on because we have the luxury of having a common foundation that we continually invest in. And a second lens to look at it is in terms of verticalization by industry, which we do today through our solution partners, through our marketplace partners and the ability to go do templatization and consideration across our horizontal products. That's always been a strength for Atlassian, and that's why we see the kind of stickiness that we do, especially across our existing customer base.

Two tiny add-ons. We do verticalization here. So for example, we have an automotive customer group who get together where we connect their automotive customers together. So we do a little bit of that alongside some of those partners in the industry-specific things. The second one is when Anu talked about templatization just because no one's mentioned AI in about 11 seconds, I wanted to add in. You saw a great example from Scott on stage about how we're going to use AI to continue to enhance those templates, right? Our templatization used to be human driven, right, create an HR service desk, et cetera. To be able to use AI with all the templating capabilities we've ever had, to make more detailed templates for what you need is a real strength. We're only just at the cusp of sort of exploring that, but you saw some of it in Scott's keynote how we can we can verticalize our teamwork foundations products and some of the more broader products like JSM using AI. I think it's a really a [ virgin ] area for us to keep exploring.

Then [ Arjun ] mentioned cross-sell as well. Do you want to touch on cross-sell a bit more, Joe, and...

Yes, absolutely. As you've seen the strong product portfolio, the strong road map of innovation we're going to be rolling out, we're going to have increasingly relevant products that we're going to be able to cross-sell into that installed base of customers and seats. And so that will be definitely a lever that we'll have going forward. It will probably be more impactful in the future than it is today, just given the level of innovation that we're going to be bringing to the market over the next 3 years.

Why don't we go to Gregg right there, Wendy?

It's Gregg Moskowitz with Mizuho. So the guidance for a revenue CAGR of 20% plus over the next 3 years, along with surpassing, as you said earlier, 10 billion within 5 years, which I think is a CAGR of 18% plus; both of these are better than investors, generally speaking, I would say, were expecting. Two questions around this. First, how much go-to-market focus would you say was being diverted, if you will, towards migrating Server customers ahead of end of support? And then secondly, when I look at your business today, you have -- it's growing very nicely, very significantly, but you still have less than 500 customers that are spending $1 million or more. It feels like it can go a lot higher, but how much might the go-to-market need to change to drive a lot more wallet share with enterprises that will help propel you to these financial targets?

Let me jump in. It's my final go-to-market question, I guess, to answer. I think the answer is yes to both. So let me get into more detail. We have prioritized migrations for our customers over the last few years because that's the gateway to all the R&D goodness that we're building in Cloud. And so there's no point trying to cross-sell them something in Cloud if they're not in Cloud in the first place. And so that does mean there is a sort of disproportionate investment in the go-to-market motion to help support that. That's everything from migration managers, and that's like getting people to have all the pitch decks and so forth to convince customers to make that choice. Now we still have a large number of Data Center customers that are moving, and that's not going to go away. The proportional investment, I expect to slow down over time in terms of the amount of effort we're putting into migrations. We've built the pitch decks to convince people to come across. We've got the migration management. And at a technical level, which is not go-to-market, but the R&D investments we've made on all the tooling to move people across. So again, those investments can moderate over time. So what we're now seeing is that those go-to-market investments and those people have more time to have conversations with customers. And so that's from two aspects. One is that [ disproportionately ], they are spending less on the migrations. And two, more of our customers are already on Cloud, which means that they've kind of passed through the gateway, and we can't sell them additional products. I do expect for us to get better at that -- like a sales motion over time because we have been investing in migrations, like I think that's got a long way to go before I say we're world-class at all those things through a sales motion, the first part of that. On the second side, in terms of large customers, you said like we're 500 over $1 million. Enterprise is just such a big opportunity for us out there. And I talk about internally that to double our revenue doesn't mean we need to double the number of lines of code we have written for our customers. And in the enterprise, there's a huge opportunity for us to have high R&D leverage in what we deliver to those enterprise customers and [ commensurate ] a [ high ] ARPU for those things that we deliver. And so I do expect to see sort of like both R&D and go-to-market leverage over time as we get [ down to serving ] these enterprises.

Why don't we go up front here, [ Marshall ]?

First to comment, Joe and Martin, this has been a great presentation with a lot of incremental disclosure that's really granular and helpful, and thank you for that. It's fantastic. And then a question for Anu. If you do the rough math, it looks like your ARPU for Fortune 500 customers is about $900,000. It looks G2K ex Fortune 500 looks a little under $750,000. You came from a company where those numbers would have been much, much larger. When you think about the headroom in ARPU, what needs to be done to get there? What is product, what is go-to-market, what is just sort of behavioral longer-term pricing, et cetera? And when we're at 10 billion, what do you think the mix looks like? Is it heavier to G2K, or is it similar?

Yes. Thanks for asking the question. It's a great one. And it's one that we talk about a lot because that's where we see the opportunity in enterprises, as we've told you. The way I think about the customer shift, just answering it from the reverse direction, is that like Scott talked about, we already have a lot of these enterprise customers using our products. So it's a very different sales motion from the place I came from. For the rest of the room, I came from Microsoft. So it's not like we have salespeople having to go to a brand-new enterprise and start telling them, "Hey, here's a company called Atlassian and here's something called Jira." So it's not like the enterprise sales motion typically that other customers -- other vendors do. But as we think about enterprise customers, what do we have to do at Atlassian for our very unique business model, it's very much how do we sell them the enterprise edition of our products and help them go wall-to-wall such that they see the value of deploying [ our ] product wall-to-wall and deploying specialized solutions of products for specific teams. For IT teams, our JSM and related products; for developer teams, our Jira, Bitbucket, the rest of the developer products, which is a slightly different GTM motion. And like Scott mentioned, our first step there was getting them to Cloud because that's where we have all these additions and different collections of products, so to speak. So I'm very pleased with our progress in taking step one, which is getting enterprises on to Cloud. And that required significant product investment, to your question. So from an R&D perspective, we've made multiyear investments on performance, on scale, data management, compliance. All of these are pretty much checkboxes we needed to first check off in order to even get to the 500 number you were talking about. Now that R&D investment is continuing. And like I described earlier, from migration, we're able to take some of that and redirect it to enterprises. And I'm confident that things like FedRAMP, HIPAA, a lot of these are ongoing investments that we will continue to deliver on and therefore, be able, from a product perspective, to have a really strong offering to get more and more enterprises to adopt us in the way that we would like them to. On the GTM side, I think this is an advantage we have that we are not going to have to do these cold calls and suddenly start selling these at different places. But like Scott described, there is a way to go there. There are some ways that we need to cover in terms of what do we do on GTM, not just on sales but presales, post sales, customer success, how do we actually scale this with the efficient model we have established? As a company, we are very disciplined about making sure that we take incremental evolutions there. And like we have described, we think taking incremental evolutions on the GTM model still puts us very much within line of sight of what needs to be done to get those enterprises on our platform. So together with the central platform and the continued investments in R&D and the evolutions in GTM, I think we will be in a strong place to increase that 500 number.

Let's go the guy on the left here.

Joe, a couple of questions for you. First on the marketplace. If I remember correctly, you eliminated your takeout of the Cloud apps in order to drive your marketplace to shift to the Cloud. When do you turn back on? Is this a perpetual zero? Or once everybody is there, then it's time to take your cut out of that as well? And then second question, in your commentary about the impact of Data Center to [ Cloud ] transition, you talked about mid-high single-digit impact on Cloud growth points coming from this transition. But can you talk qualitatively what percent of your Data Center seats do you expect will convert in this 3-year time frame? If not in the exact number, which will be great, perhaps qualitatively, the majority, anything that could give us an extent of how big of the -- how much of that Data Center do you think really moves over? I appreciate it.

Yes, I'm not going to be able to give you a specific number on the seat count. I think the mid- to high single-digit estimate of Cloud revenue growth coming from Data Center migrations is a good rule of thumb that you can use. What gives us confidence on that is just the incredible size of that Data Center installed base and all things we're doing that Anu mentioned earlier to enable our customers to move to the Cloud. On the marketplace Cloud take rate, we'll continue to keep the take rate as it is for the foreseeable future because it is driving the right incentives around creating Cloud apps and building momentum around that. So for the foreseeable future, we don't see a change, but we'll thoughtfully evaluate that and be pragmatic as we see that play out over the next few years.

Maybe just a follow-up on the Cloud -- the Data Center to Cloud. In 3 years from now, what would be a reason for a customer not to move? Do you believe that all the scale and enterprise features that you're still trying to put in will be largely in place? Would it be a reason for anyone not to move into Cloud in 3-year time frame?

I don't -- I'll take it from the backwards. There's probably -- given the size of our customer base, will we ever reach a singular point where every single one of our customers has no reason to move? Maybe, [ you can argue, no ]. Right now, the majority of our Data Center customers, I would argue, have a reason to move today. We're continuing to do things like delivering on our FedRAMP commitments, as an example of many. We have a public Cloud road map, which you can all see, and we're delivering against that road map, right? Those are going to continue to take away any impediments there may be for customers or some portions of those customers not to move. Again, to my [ exaltation ], Data Center customers are not singular entities usually, right? Even as FedRAMP, as an example, to continue that thread, it's other than big government or obvious sort of customers. There are a lot of customers who say, "Well, part of my business need FedRAMP and part doesn't." Great. So part of it's already moved, and some is going to move in the future, et cetera. So look, we continue to work really hard on that. In 3 years' time, I would say that number will be even higher than -- a majority of customers today have a reason to move. We also want to make sure those customers move at a pace that makes sense for them as well as us, right? Will we have more compelling offerings in the Cloud in 3 years? I guarantee it. I can guarantee our Cloud offer will be more compelling in 3 years than it is today. So that will continue to give them even more reason to move over time. We've only had 2 -- what did we got here, on Sunday, Monday, Tuesday, so a couple of days with customers. Again, I have not run into a single customer who said, "I'm not going to Cloud." It's just "Here's my time frame. Here's my schedule. Here's my thing." Sometimes "Here's a list of things I need." But more often than not, "I get it. Wow, you guys have done a great job with those sorts of things. The scale improvements really help me." That's a good example or data shares is a good example, right, the external data sources and analytics. Some of these things that may not be broadly understood. If I can explain the analytics example, a lot of customers used to go straight to the Jira, Confluence database, with [ SQL ] to do effectively analytics. And we don't let them in the Cloud, go to our databases. And sometimes, we don't even have a database nowadays, so we can't do that. So we need to do the data modeling to put in the data lake and give them a [ SQL-like ] device analytics. It's a good example that's an unblocker for those large enterprise customers that is not often talked about. But our continued investment in analytics, I can tell you, is really [ resonant ], right? 2 or 3 customers have already mentioned to me, "Wow, you guys have come a long way in 12 months in analytics or 24 months since announcing I guess, 12 months since GA." So a lot of those capabilities will make a big difference.

We've got a financial-oriented question for Joe. I think it's a good one to address. So in the medium term, how do we think about free cash flow margins relative to operating margins?

Yes, thanks for the question. Typically, we will see free cash flow margins correlate with non-GAAP operating margins. We typically see about a 5 percentage point gap between those two. It may vary period to period, just given timing. But for the medium term, we expect to maintain that type of spread between the two. So you can think of it as non-GAAP operating margins plus 5 to 6 points to get to your free cash flow margin estimate.

Sanjit in the middle. That might be challenging for you, Wendy.

Sanjit Singh, Morgan Stanley. I want to echo [ Marshall's ] -- on complements on all the great disclosure today, that's been super helpful. And then Scott, it's been awesome working with you for the past 10 years and an outstanding career and all the best in -- I know we're going to have plenty of time to say our goodbyes, but all the best in your future endeavors. I wanted to talk about two topics. One on growth, when we sort of frame out the TAM on the serviceable -- addressable market as well as the 20% growth. To what extent are you guys anticipating any sort of headwinds on [ per seat ] based pricing? It's a question I asked on the earnings call. But if you're driving a lot of productivity, let's say, in agents and customers don't have to hire as much as they did before. Don't need -- expand how you guys are thinking through that as part of the overall growth equation. I know you can expand to more teams to address that. But just on the seat-based pricing debate, what's sort of the team's latest thoughts on the revenue side of the equation? And on the margin side of the equation, I wanted to get a better understanding of now that you don't have a server base to support, how much capital -- along with productivity improvements with your engineers, how much capital is that freeing up to invest in the go-to-market enterprise? And how will that ultimately drive margins to that 25%-plus target over the next couple of years?

Let me take the first question, which is, I think, on everyone's minds, is AI drives productivity. If you're a SaaS vendor, you charge per seat. So therefore, if any less seats, what does that look like for the growth out there? And I think everyone ask -- other vendors out there know that there's some sort of usage-based pricing in our future out there. Now we've looked at this internally. I don't think we have anything out there publicly, but this is something we're looking at in conjunction with our customers as to how do we deliver value based on usage-based pricing. Two other things that I think are interesting that I think we have advantages relative to other SaaS vendors. One is that we see to expand the market for what we do compared to many other vendors. And you saw -- [ listened ] to Rivian up here, where they have 1,200 seats at the service desk in a company with 15,000 people roughly. So 1 in 10 people have a service desk. And every other vendor -- it's sort of out by an order of magnitude or more what most of the vendors would have. And so we have a history at Atlassian of effectively expanding the market by being more aggressive on pricing for what we do. And so that helps us a lot. Maybe Rivian save 10% of their seats like by AI, but we're 10x larger than our competitors. The second one is our per seat pricing on a monthly basis is just significantly lower than many of our competitors out there. And so the thrash and difficulty to go through that transition from a seat-based pricing model to a usage-based pricing model is going to be a lot easier for us, right, which I think $20 a month for a service desk agent, someone else is charging $200 a month for a service desk agent. When you switch to usage-based pricing, someone is like, "Well, to do that, it's going to cost you $4 every e-mail you send," that's going to be really difficult for customers to swallow those types of usage-based pricing. The one we [ have for ] cheaper, "Oh, it's going to cost you $0.04 to send an e-mail," like hypothetical numbers, but the idea is it's going to be a lot easier for us to make that switch to consumption-based pricing. I don't think anyone can stand to say exactly what that will look like over the period of time. But when I look at the value we deliver to customers, AI so significantly increases what the value we can deliver for customers, that the optionality there, like for how would we price it, right, puts us in a way better spot than we are today. So I don't know, we don't know all the details of what that will look like in 5 years' time. I just feel really confident about that being like a tailwind for us rather than a headwind.

And then on your margin question, you're absolutely right, with server and support, we do free up capital, we do free up resources that we're focused on [ that ], both on the R&D side and the sales and marketing side that can be redeployed. By the way, we're going to have the same phenomenon around the Data Center migrations, a lot of the work that's happening in the company around enabling people to move to the Cloud, enterprise-grade capabilities, certifications, reliability, scalability, all the things we've talked about, performance. Once we meet the bar and we deliver on those things, that does give us the ability to move resources within the organization, that is built into that greater than 25% operating margin or the ability to return to historical operating margins. So you see that in some of the line items like R&D, we expect that to be a smaller percentage of revenue going forward, that's a big part of it. You don't see as much in sales and marketing because we are making the big investments in the enterprise-grade capability there. So it is absolutely part of our resource reallocation process that we're going to play out over the next 3 years.

Follow-up. On the 20% CAGR, I just want to make sure that doesn't assume at least 20% over the next 3 years. That's a 3-year CAGR. Is that the right way to...

It's a 3-year CAGR.

3-year CAGR.

And greater than 20%.

And greater than 20%.

Yes. 20% plus.

I will go to Fred.

Fred Havemeyer from Macquarie. I was thinking of doing an AI question, but I think I'll give you all a break from that for a moment. So I want to go macro instead. I think when taking a look at some of the job postings in the marketplace for IT professionals, software developers, et cetera, it looked kind of like a bitcoin chart in waves over the pandemic, went up a lot. And of course, it's contracted quite a bit. So I wanted to consider that like 20% CAGR over the next 3 years and actually, the $10 billion over 5 years -- sorry, $10 billion in revenue over the next 5-year target against this backdrop and just ask, is there anything in your forecast or estimates that really requires a turnaround in the overall hiring landscape for software engineers, IT help desk? Or are we really looking at this as a function of Atlassian able to drive growth in a really diversified manner and especially with the underpenetration in enterprise?

I would say it's definitely the latter. Firstly, I just want to be clear, it's surpassing $10 billion in under 5 years, which is a little different to $10 billion in 5 years, just if you're doing your maths. Nothing in our forecasts is currently based on the market rebounding back in a massive way. But I think we said that before, the numbers that we're giving out broadly here are based on a constant macro environment, is a way to say it. I'll leave the bitcoin analogy to others to determine whether that's accurate or not. But I just wanted to make clear that, that's not based on a massive rebound in job postings or other things at all. We do drive diversified growth across our business, right? To the question on durable growth beforehand, again, we've always, for the longest time now, wanted to grow longer, right? We still want to be growing strongly 10 years from now and 15 years from now, and that's the way that we've set up the company to date and the way that we're intending to run it in the future and continuing to do that in a capital- and margin-efficient way as we've got a reputation for doing over a long period of time. So we -- as a part of the durable growth, it is about setting up multiple products and multiple streams in multiple markets, which are all growing, to some extent, connected, as we've seen from the Dev and IT spaces, but also independently in their own ways. And that's one of the ways that we get durability and resilience, I suppose, in our growth through market conditions up and down.

Let's go to Michael here in the front.

And I would echo, there's a lot of useful information in here that we've been asking for. So thank you for all of that. I want to spend some time on the cloud expansion rate that's in here. So 120%, it's really good, given 70% still SMB and what's happening within that segment of the market. So can you help just contextualize some of the trajectory you've seen there, Joe? It sounded like from the most recent earnings call, seats are still a headwind. And maybe just help us with how much cross-sell and some of the new products and visibility in Cloud is helping reinforce the growth, even with some of the seat dynamics that play there?

Yes. Thanks for the question, Michael. I'd say if you look at the Cloud revenue growth drivers, the #1 growth driver we've had historically is paid seat expansion, right? If you go back 2 years to our expectations for Cloud growth and compare it to what's happening today, the delta is entirely explained by paid seat expansion change. And so the rest of the model continues to perform really well, whether it's migrations, whether it's cross-sell, whether it's upsell, pricing, et cetera. So the overall business remains healthy. It's just really that one piece of the business. And as you point out, 70% of that business is SMB, and SMB has been disproportionately impacted by the macroeconomic environment, and we really haven't seen it come back. Enterprise, on the other hand, is relatively strong. And so that part of the business continues to perform well. The trajectory on paid seat expansion as we talked about, it's lower quarter-over-quarter, but that trend is moderating. And so we hope to get to a point in the near future, we can say it's quarter-to-quarter stable. The thing that's holding that back is SMB right now. Longer term, we've talked about the drivers of what gives us confidence on how do we improve that, and it's really around moving into enterprise and this broader team, sell and wall-to-wall sell. Cross-sell is doing really well. We talked earlier about the number of great new products that we're bringing out that really helps drive that cross-sell number. So as we bring new products and new innovation to market, as we broaden out the user base, that's going to become a bigger and bigger part of our growth profile, going forward. I couldn't be more happy with the premium and enterprise uptake in the Cloud. We'll continue to add value to that. And as we go into enterprise, as you know, those customers predominantly purchase those premium in enterprise SKUs. So just by virtue of mix shifting towards enterprise, you should see more upside from an upsell perspective. And then pricing, we've just been kind of consistently raising prices as we've added value to the offer. You can assume that's going to continue, going forward, as we do continue to add innovation. So for us, that's how we think about the growth drivers. And then the last one, obviously, is migrations. We took a question earlier about that, where we expect mid- to high single-digit contribution to Cloud revenue growth for migrations from Data Center to Cloud. So that's sort of the trajectory we see. We do see some improvement on paid seat expansion. We do see cross-sell becoming a bigger part of the mix. And then we just see pricing and upsell continuing to kind of stay on trend relative to where it's been. Hope that helps.

Let's go to Keith.

Keith Bachman from BMO. Joe, I had a couple for you. To start with just a follow-on there, if you think about the growth algorithm, you've been heavily weighted to existing customers. And do you see that changing at all in the next 3 years? As -- well, let's just start there.

Yes. I don't see that changing. I think with our land-and-expand model, we'll continue to land, as we always have, with that really efficient and differentiated flywheel model that we have. And so we'll generate a presence in an organization, and then we'll expand from there. So I really don't see new customer logos like in a 1-year period being a material driver. And so I do expect that ratio to continue to be dominated by our existing customer base.

Okay. And then a follow-on is on DC. And as you think about it, you talked about mid-single-digit price increases, but should we assume that the price increases on DC will be significantly above that as you're trying to candidly shape behavior on maybe inducing that migration path? And just to add on to that, does DC grow over the next 3 years?

It doesn't grow over the next 3 years. I think if you look at -- if you strip away the migration impact, if you look at the underlying drivers of Data Center revenue growth, they're actually very healthy, right? It's new customers, it's seat expansion within those existing customers, it's cross-sell within those existing customers. That's been very healthy. If you strip away all the migrations, noise and some of the onetime event-driven purchasing, you'll notice that it's pretty healthy. And then pricing obviously has been a big part of that as well. I'll let Mike and Scott chime in on the pricing for DC. But in general, our philosophy is we really price to the value of the offer. We have to be very thoughtful from a Data Center perspective because we do want to provide the right incentives for customers to evaluate Cloud versus Data Center. But at the same time, we want to make sure that the Cloud platform and the Cloud offer is ready to capture those customers. And typically, those Data Center customers are our largest and most complex customers. So as we add value to Data Center and as we think about the offer in Data Center, we'll continue to raise price in conjunction with that. But from a broader strategic perspective on incentives to the Cloud, we're going to be really thoughtful about the actions we take for that.

I mean I would just say we continue to philosophically optimize price. I think it's been a strength of Atlassian for a decade plus, 2 decades almost. [indiscernible] talked about the Cloud take rate as an example, right? We don't always raise prices. We try to optimize price to where we believe the customers best have the demand. You've seen us doing that over the last few years in lots of different ways. Sometimes it's Jira Software up and JSM down. Sometimes it's a lot of different things. So I don't think philosophically, we will be changing that in the visible future.

Okay. Just one last one, I promise I'll pass the mic. But Joe, why is now the right time to give a longer-term guide? Atlassian has never had kind of a longer-term revenue margin guide, but why is now the right time?

I think we've always been a company that's managed for the long term. And I think the point we want to make is there is a durable long-term revenue growth and a profitability profile in the company. We've committed to returning to historical operating margins. A very legitimate question we get from the folks in this room is can you put a time-bound aspect of that and you've left that very open ended. So we want to demonstrate and illustrate the commitment we have, the path that we see to being able to achieve that and the timing of that. And we want investors focused on total revenue growth, right? We've got a great Data Center business. We've got a great Cloud business. Both of those are very healthy and will grow over the next 3 years. But we really want the focus to be not on each individual one, but in total from a subscription revenue perspective because really, we feel that reflects the true health of our overall business, going forward.

I think it's also probably fair to say, Joe, correct me if I'm wrong here, but I'm pretty sure we all feel this way; the visibility into that future is a little different than it was a couple of years ago, getting through the end of Server -- end of Server support transition. And as you saw, like Data Center migrations are up [ 90-odd-percent ] year-on-year. So the visibility of the major movements we have inside our world and getting through the February end of Server date gives us a different profile over the next few years than we've had over the last year.

Colin in the front [indiscernible]...

Its Colin Ducharme with Sterling Capital. Keith was a great springboard, I'll riff off the disclosure ask. Mike, Scott, I know you all projected very confident views on the durability of growth, great disclosures with the new products, et cetera. So very -- thank you for all of that. My question is, there were several of us in the room today that have been positively surprised by some of the product-level metrics disclosed in the documents here. And I guess my question for you, Joe, is to -- is there an opportunity from a disclosure standpoint as the shape of the growth begins to change and move more towards cross-sell to provide a revenue attribution by product, by customer type, a more regular NRR update, so that way you can, I guess, true up the market expectation to your own confidence of the durability of the growth?

Yes, it's a fair question and a fair comment, and that's feedback we'll take, Colin . The reality is we do -- we will change and evolve our reporting as our business evolves and changes, right? The metrics, the communication that we had in the past when we were behind the firewall company should change as we get more towards the cloud. So as you all know, we love feedback like that. We take that into account, and we try and evolve and adjust our communication and metrics and KPIs to be more relevant to the business that we have. And so we'll take that into consideration as we think going forward.

And then a real quick follow-up, more specific on the [ SBC ] line item. You guide towards 25% with a slight glide down over the medium term. Can you give us, I guess, a qualitative view on how you think about that gliding down over time? Because there are companies that are at your scale or perhaps larger that grow at rates at or higher that have a lower [ SBC ] percentage. And that's a great leverage item for your GAAP profitability over time.

Totally, you're thinking like I am, absolutely. So great question on this one. So stock-based compensation, I would say we think about this much like we think of other elements of compensation expense, right, which is attracting and retaining the best talent possible. And nothing has really changed or will change fundamentally about our compensation structure and framework, which is all market-driven. If you look at that stock-based compensation line today, that reflects decisions that were made 2 or 3 years ago on grants in a totally different market environment. So we actually think we have good levers in optimizing the plan to reflect the current market reality that we're operating in. And then as we pointed out in the docs, we think we have the opportunity to moderate headcount growth relative to revenue, and headcount growth is really the primary driver around stock-based compensation. So those are the levers we're highly confident we can get there. And you're right, when we think about setting goals, we look at our peer comparables and say, "Hey, like we should be able to get on a glide path down to that level of stock-based compensation as a percent of revenue. There's no reason we shouldn't be able to do that, plus or minus." And so that is the plan, going forward. So I wouldn't read too much into the slope of the arrow in terms of the North Star and the goal that we have. It really is focused on looking around at peer comparables and benchmarking ourselves against that and putting those plans together. And you're right, you're absolutely right, that is a key lever in our goal to achieve sustainable GAAP profitability.

Let's take one final question, I guess, Alex.

I guess, maybe without giving -- I appreciate the focus on total revenue and really appreciate all the disclosures and the focus on durability of growth. But as we've seen the last -- or at least the guidance suggests an acceleration in cloud for Q4. And next year, you have a tough Data Center comp, particularly in the second half. . So as we think about the slope of Cloud versus Data Center, maybe over the next 2 years, not so much the years beyond that; is there, I guess, Cloud accelerating and Data Center, they are going to go like this? Or what's the right way for us to think about that dimensionally?

Yes. We'll give more definitive detail on the FY '25 guidance, Alex, on the earnings call in July, August when we report Q4 results. In the docs, we've tried to give you the drivers -- the core drivers for each one of those. I would touch and just go back to what we talked about on the call, which is we do expect healthy revenue growth in FY '25 from both Cloud and Data Center. I talked about the shape of that Data Center revenue growth that we are going to run into tough comps in the second half of the year, both from the comparison to the end of support event-driven purchasing as well as the fact that we're going to see the roll-off of Server migrations to Data Center, right? And so you're only going to have a headwind at that point, which is the Data Center to Cloud migrations. So that's that. And then from a Cloud perspective, we shared our drivers in the document, and we'll talk more about those drivers, going forward. But overall, we expect to see healthy revenue growth from both for the full year.

Scott, do you want to close this out?

Yes. We're finishing up. I think [ we have ] drinks outside after this, I think we're -- so I'll get to catch up with you one-on-one there. But it is my last, I guess, Investor Day on stage, and that's a bittersweet moment for me. And I want to say just a huge thank you to all of you. There's a few new faces in the room, but many, many faces that have been around on the Atlassian journey for close to a decade. And there are two things I think we really want from investors. We want investors to think about Atlassian in the long term because that's how we operate as a business. And we want investors to spend the time and effort to understand what we do as a business and be informed about that. And I could not be more blessed and we could not be more blessed to have investors like yourself who think long term and invest the time and effort to really understand the Atlassian story. And I know many of you have traveled, I think, all the way from Australia today to come be here. And I just want to say from the bottom of my heart, thank you. It's been a great decade for me. And again, thank you for all your time today. I hope to see you at drinks afterwards. Thank you, everyone.