Atlassian Corporation PLC

NASDAQ:TEAM

Earnings Call Analysis

Record Billings Drive Company's Growth

The company's recent quarter was marked by record billings, exceeding expectations and contributing to an impressive 30% year-over-year growth in unearned revenue. The remaining performance obligations also soared, exceeding $1.9 billion. This financial achievement was principally driven by robust sales execution, resulting in substantial multiyear deals. Furthermore, the enterprise space has expanded due to impactful hybrid Enterprise License Agreements (ELAs) and dual licensing strategies, both crucial in securing long-term customer relationships and fostering migrations over time.

Atlassian's Historic Milestones, Strategic Focus, and Cloud Migration Momentum

Atlassian entered a defining chapter with its $1 billion revenue quarter and significant inroads in cloud acceleration. Leadership emphasized the company's strategic focus on cloud migrations, enterprise servicing, integrated product service management (IPSM), and pioneering developments in AI. The embedded culture of innovation shone through the introduction of new products and the acquisition of Loom, driving home the point that the company's cloud capabilities are integral to delivering full Atlassian experiences to their clientele.

Financial Highlights and the Path to Accelerated Growth

Atlassian's cloud revenue climbed by 27.5% in Q2, influenced slightly by the addition of Loom with an upward revision expected in the latter half of the year. This expectation is fortified by stronger than anticipated enterprise customer billings, a thriving uptake in premium product versions, and moderating deceleration in SMB paid seat expansions. Enterprise solid performance and customer conversion from free to paid models in the cloud showcase sustainable, forward-looking growth potential.

Ongoing and Future Cloud Migrations Fueled by R&D and Critical Partnerships

Cloud migration is not a fleeting trend but a multi-year journey, with a noteworthy pivot from Atlassian's data center customers. With R&D as the catalyst and ongoing product enhancements, management envisions removing migration barriers and aligning with customer expectations to enrich partnerships, particularly with large enterprises. Atlassian's mission-critical products and emerging offerings, particularly in AI, present opportunities for further customer engagement and the potential for substantial seat expansion.

The Stepping Stone: Server to Data Center Transition Then to Cloud

Atlassian witnessed robust server migrations exceeding projections, resulting in strong data center performance, highlighted by paid seat expansion. Although cloud seat expansion was not as high as expected, particularly within the SMB sector, the data center is seen as an important midway point for customers before they transition fully to the cloud. Farquhar underscored that customers of all sizes recognize the cloud as their ultimate destination, and that migrations will unfold over time.

Stabilization of Free-to-Pay Conversion: A Gauge of Long-Term Success

Atlassian perceives the stabilization in conversion rates from free to paid users as a signal of long-term success, signifying the retention and potential expansion among newly acquired customers. This progression is credited to both macro trends and improved internal efforts to enhance the conversion process. Going forward, the company exudes confidence in the durability of this trend.

Earnings Call Transcript 2024-Q2

[Operator]

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

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

[Martin Lam, executive]

Welcome to Atlassian's Second Quarter of Fiscal Year 2024 Earnings Call. Thank you for joining us today. Joining me on the call today, we have Atlassian's co-founders and co-CEOs, Scott Farquhar and Mike Cannon-Brookes; Chief Financial Officer, Joe Binz.

Earlier today, we published a shareholder letter and press release with our financial results and commentary for our second quarter of fiscal year 2024. The shareholder letter is available on Atlassian's Work Life blog and the Investor Relations section of our website, where you will also find other earnings-related materials, including the earnings press release and supplemental investor data sheet.

As always, our shareholder letter contains management's insights and commentary for the quarter. So during the call today, we'll have brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we have.

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

During today's call, we will also include non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the Investor Relations section of our website. We'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take one question at a time.

With that, I'll turn the call over to Scott for opening remarks.

[Scott Farquhar, executive]

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

These accomplishments are a true testament to our amazing team, our diverse and passionate customer base and the high-value mission-critical products we deliver. Mike and I are extremely proud and thankful for every single Atlassian who has helped to get us here. In Q2, our R&D engine continued to deliver incredible innovation across our Cloud platform. We rolled out Compass, Virtual Agent capabilities in Jira Service Management on our first phase of the Atlassian Intelligence capabilities into general availability.

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

And we're in a great position to get after them with massive market opportunities, strong customer commitment to the Atlassian platform, a unique ability to combine over 20 years of insights with the immense power of AI, and most importantly, a world-class team.

With that, I'll pass the call to the operator for Q&A.

[Operator]

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

[Keith Weiss, analyst]

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

[Joe Binz, executive]

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

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

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

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

And then finally, other Cloud growth drivers like cross-sell and customer retention churn and monthly active usage continued to be very healthy and performed in line with our expectations. And beyond that, we didn't really see anything noteworthy in terms of linearity in the quarter or across products, regions or verticals that were largely in line with our expectations.

In terms of the confidence around the H2 guide, the midpoint of our H2 cloud guidance range excluding Loom does assume slightly accelerating growth rates. The factors that give me confidence are the recognition of those strong Q2 billings on annual and large multiyear agreements rolling off the balance sheet, the increasing momentum on Cloud migrations as we focus on unblocking more customers for moving to the Cloud, and continuing to bring new innovation and value to our Cloud offering, the benefit of price increases that are laddering into the model and the momentum we're seeing in enterprise driving healthy upsell to premium and enterprise versions of our products.

I talked about the slope of the trend line on paid seat expansion rates, and that continues to moderate quarter-over-quarter. And I also mentioned the leading indicator around free-to-pay conversions at the top of the funnel. So those are the types of things that give me confidence in the ability to deliver accelerating cloud revenue growth in the second half of the year. And I hope that helps.

[Operator]

Your next question comes from Michael Turrin from Wells Fargo.

[Michael Turrin, analyst]

For Scott or Mike, there's been plenty of buildup and probably too much focus from us on the server end of life. For investors asking us what's next, the letter does a good job in framing some of that out. But maybe you can share your vision around what the cloud migration opens up for Atlassian from here.

And then, Joe, just as a follow-on the 10 points of migration tailwind that Cloud line has been -- how should we think about that post server end of life, will that at all lessen? Or does it simply shift more towards data centers? Any puts and takes there for us to consider are useful.

[Scott Farquhar, executive]

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

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

We've launched data residency in Canada. This last quarter, we also did launch Bring-Your-Own-Key secure software. We continue to remove blockers for our cloud customers and that continues to open up the aperture of migrations. The second point I'd like to make is that Cloud continues to be the gateway to the full Atlassian experience. And Customers, once they get to Cloud are really getting the best we can offer. And you see us continue to deliver innovation in Cloud. So whether that's comfort, which has continued to grow, Jira Product Discovery, which we talked about passing 4,000 paying customers, also Loom in our ecosystem and all the AI functionality that we have already developed and continue to develop are only available in Cloud.

And so with that, our customers get a better experience, but we also have an incredible opportunity to sell customers more products and more functionality that really makes a difference for them. And lastly, enterprise, the third thing is enterprise, which is through these migrations and having these discussions with customers around migrating to cloud, we've really deepened our relationships with our best customers, whether they're North American financial services customers or German auto manufacturers, these discussions have led to us being seen more and more as a strategic partner for them, and they want to do more with us.

And you saw that, we talked about Mercedes Benz in our letter that Mercedes Benz migrated 30,000 fleets from data center to cloud and -- of Jira and Confluence. And as part of that, we're so excited by the usage of our ITSM solution in that process that they then have adopted that and started using it with their customers. And so we are becoming more and more a strategic partner for these large enterprises.

Joe, do you want to talk about some of the puts and takes?

[Joe Binz, executive]

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

[Operator]

Your next question comes from Gregg Moskowitz from Mizuho Securities.

[Gregg Moskowitz, analyst]

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

[Joe Binz, executive]

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

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

[Operator]

Your next question comes from Fred Havemeyer from Macquarie.

[Frederick Havemeyer, analyst]

I wanted to ask, as we start this year, we've once again seen that layoffs in the tech industry have been picking up, although it was substantially lower scale than what we saw in the prior year. So I wanted to ask, as we look at your outlook and the cloud revenue growth, how comfortable do you feel that guidance is once again derisk for the potential impacts from any sort of layoffs in the tech industry.

And secondly, have you seen any signs at all that these layoffs may be impacting anything in your free-to-paid conversion or anything else to date?

[Joe Binz, executive]

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

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

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

[Scott Farquhar, executive]

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

I had thought that might happen early in the economic cycle, but it's actually showing up pretty strongly now in a lot of the deals that we're doing of replacing other products out there that might be older and/or more expensive. We're also seeing that in AI and the excitement around customers who are excited to use our AI features. And then the new products that we are delivering in Cloud are having great customer reception.

But it's still very early days. I think that Jira Product Discovery is a great example we talked about where we're delivering innovation and value to these customers in Cloud and they're picking it up and running with it. So they're all strong areas that I think, are sort of counter to any layoffs in technologies.

[Operator]

Your next question comes from Karl Keirstead from UBS.

[Karl Keirstead, analyst]

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

[Joe Binz, executive]

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

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

In terms of the end of support moment, we're about 2 weeks out. And really, there's been no change from what we discussed last quarter other than that we're seeing those stronger renewals and customer retention. We end of server support in a couple of weeks. There's been no change to our focus around migrating as many of those server customers as possible. The customers that remain on that server installed base are predominantly larger, more complex accounts that are typically blocked from the Cloud at the moment. So we continue to expect most of those customers that migrate -- will migrate the data center. And we continue to hold prudent assumptions to account for customers who will choose not to migrate in FY '24, and that's also factored into our guidance.

[Scott Farquhar, executive]

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

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

[Operator]

Your next question comes from Kash Rangan from Goldman Sachs.

[Kasthuri Rangan, analyst]

Congratulations on the results. From a trend line standpoint, the Cloud migration is a big opportunity, clearly. But when you look at the trend over the last 5 to 6 quarters or so, the Cloud has decelerated from 49% or so, I think it was Q1 last year to 27%, and a big chunk of that is coming from migration. So if you look at the net underlying Cloud growth rate, it has decelerated or server continues to -- data center, I am sorry, continues to be a champion. It's gone from 54% or so to 41%.

Can you help understand what could be causing the dichotomy that -- maybe there is a preference for the data center product. If that's the case, then what does the long term look like for the company? Because companies generally either have a cloud product that wins or an on-prem that wins rarely does both win, but maybe it does for Atlassian. Can you help us understand what are you really betting on with your customers? Where do you wish your customers to really go and how are you going to make it happen?

[Joe Binz, executive]

Yes, Kash, this is Joe. Customers are not choosing data center over cloud. What's happening here is server migration to data center and cloud both exceeded our expectations. And so we don't see more customers choosing one over the other. If there was any weakness in our cloud performance versus expectations, it's that paid seat expansion has been lower than we expected. And this quarter, it was slightly lower than we expected, particularly in SMB.

DC strength on the other hand, as I mentioned earlier, was also driven by stronger migrations from server as well as paid seat expansion. So we feel really good about the fact that customers are looking at data center as a stepping stone to the Cloud and ultimately, we want to get those customers to the Cloud because that's where our customers receive the best experience, the most secure experience from Atlassian, and it gives us a chance to add more and more value over time, as Scott discussed earlier in the call.

[Scott Farquhar, executive]

Let me add to that, which is every customer I've talked to, whether that be a German bank kind of we would consider on a more conservative end of the scale through to small, medium-sized businesses out there even in regulated environments. All of them are telling me the Cloud is the future. And if you went 5 years ago, we were telling customers Cloud with the future. These days customers are doing calling me. That's the case.

And in many cases, is that, they either need the time to plan a migration if we've got tens of thousands of users, that is a chance not only to migrate to the product we have in Cloud but expand your usage of Atlassian, look at other products that we can replace and so we see a lot of that happening, but that takes a little bit of time at the largest customers or in some cases, but decreasing. Our customers have bought some Cloud and they are pushing us to say, "Oh, I need data residency or a certification or FedRAMP." So we're thinking about a lot of that with our customers.

[Operator]

Your next question comes from Nick Altmann from Scotiabank.

[Nicholas Altmann, analyst]

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

[Joe Binz, executive]

Thanks for the question. We do see it as a stabilizing -- durable stabilizing factor. We think it's super important because it's a leading indicator of success. Today's land and new customers are tomorrow's expansion opportunity. So we fundamentally believe that a lot of that is macro driven. I'd also say we've done a good job of investing to improve the efficiency of our funnel and to improve the efficiency and the hit rate on that free-to-paid conversion.

And so hats off to the team inside Atlassian who is doing a phenomenal job on driving improvement there. So some of it is macro, some of it is absolutely our own execution. And overall, we feel it's durable moving forward.

[Operator]

Your next question comes from Ryan MacWilliams from Barclays.

[Ryan MacWilliams, analyst]

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

[Joe Binz, executive]

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

[Scott Farquhar, executive]

No, it's okay, Joe. You go ahead.

[Joe Binz, executive]

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

[Michael Cannon-Brookes, executive]

And Ryan, just to chime in, this is Mike here. I'll give you over to a brief because you haven't asked any product questions today. I've also -- it's about the long-term partnership with our customers. I think that's really important, even more so for the biggest of the big. One of the things that the customers will tell us is that they've been really impressed by our delivery over the last 3 to 5 years in the cloud of enterprise capabilities. We have a public cloud road map.

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

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

[Operator]

Your next question comes from Keith Bachman from BMO.

[Keith Bachman, analyst]

Congratulations on the solid quarter and guide. Joe, I wanted to direct this for you. You've implicitly given us guidance for the June quarter, which is post the expiration of server. And I just wanted to get your thoughts to what extent is the June quarter a reasonable proxy without -- for FY '25 growth rate.

So I'm not asking for '25, but I'm just asking, is there anything usual in the implied growth rates for cloud and data center that we should think about as we're considering our '25 estimates. In other words, is the February deadline going to pull forward a bunch of revenues? Or is there anything else that we should think about for that June quarter exit run rate?

[Joe Binz, executive]

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

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

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

So we feel very confident in our ability to deliver healthy revenue growth over a multiyear period in the Cloud. And then obviously, server is going to be zero essentially in 2 weeks when we get to the server and to support. So that's the color I'd give you for now. We'll continue to update you over the course of the next 6 months. But that's how I would -- that's where our mindset is, and that's how I think about it directionally.

[Operator]

Your next question comes from Fatima Boolani from Citi.

[Fatima Boolani, analyst]

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

[Michael Cannon-Brookes, executive]

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

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

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

[Scott Farquhar, executive]

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

And not only is that being recognized by analysts, but key switcher stories, right? We have a lottery travel company who've been a 15-year customer of one of our large competitors in this space, who started out -- who switched to JSM and switched away from that legacy vendor. And we see that again and again with a large logistics provider who moved 1400 agents to JSM. So we're really -- we've been strong historically in the SMB space. That's kind of where we started. We're increasingly seeing strength in the enterprise space as well, as well as industry analysts are recognizing us.

[Operator]

Your next question comes from Alex Zukin from Wolfe Research.

[Aleksandr Zukin, analyst]

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

[Joe Binz, executive]

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

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

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

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

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

[Michael Cannon-Brookes, executive]

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

We certainly have a large investment as a world-class, world-leading R&D organization and continuing to do the things we did last quarter, cheaper, better, faster and more efficiently. Sometimes that money has returned, as Joe said, in the finances. At other times, it's invested in other things. So it might be we learn how to do things more efficiently and run systems and services more efficiently, that then allow us to do things like that a residency in a global sense, other times in things like Atlassian Intelligence, a lot of the AI features, it's about getting the features out first, and then working out how to cost optimize over time as we watch customer usage patterns, we can work our head of scale and make that more efficient.

So certainly something in engineering, we spend a lot of time working on, and we've had great results over the last 2 to 3 years as our Cloud platform has grown increasingly more complex, but also that gives us more leverage.

[Operator]

Your next question comes from Brent Thill from Jefferies.

[Brent Thill, analyst]

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

[Michael Cannon-Brookes, executive]

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

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

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

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

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

[Operator]

Your next question comes from Ari Terjanian from Cleveland Research.

[Ari Terjanian, analyst]

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

[Joe Binz, executive]

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

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

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

[Operator]

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

[Michael Cannon-Brookes, executive]

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