Atlassian Corporation PLC

NASDAQ:TEAM

Earnings Call Analysis

Atlassian Reports Strong FY '24 and Prepares for Future Growth

Atlassian had an impressive FY '24, generating $4.4 billion in revenue and over $1.4 billion in free cash flow. The company surpassed 300,000 customers, launching key innovations like Atlassian Intelligence and Jira Service Management updates. Despite macroeconomic uncertainty, Atlassian projects a conservative 16% revenue growth for FY '25 but remains optimistic about achieving over 20% compounded annual growth over the next three years. The company is poised to leverage a $14 billion opportunity within its existing customer base and aims to surpass $10 billion in annual revenue. This earnings call also marked co-CEO Scott Farquhar's last, acknowledging his 23 years of contributions.

Introduction

Atlassian recently held their earnings call for the fourth quarter of Fiscal Year 2024, revealing remarkable growth and solidifying their position as a leader in the enterprise software market. This summary will highlight key points discussed during the call, providing insights into their financial performance, strategic initiatives, and future outlook.

Financial Performance

Atlassian achieved a revenue of $4.4 billion and over $1.4 billion in free cash flow for FY 2024. The company has surpassed 300,000 customers, with significant contributions from innovative product launches like Atlassian Intelligence, Compass, and virtual agents for Jira Service Management. These efforts have translated into impressive top-line growth, although the Q4 cloud revenue of 31% slightly missed their guidance of 32%, mainly due to the timing of enterprise deals closing later than anticipated.

Product Innovations and Acquisitions

The company emphasized their ongoing commitment to innovation, highlighting the recent availability of products such as Atlassian Intelligence and new integrations including Loom. The acquisition of Loom is expected to have a positive impact on FY '25 cloud revenue, contributing an estimated 1.5 to 2 points of growth. Although Loom might slightly dilute the FY '25 operating margins, its long-term potential in transforming workplace communication remains promising.

Challenges and Risk Management

Atlassian took a more conservative and risk-adjusted approach to their guidance for FY '25, reflecting uncertainties in the macroeconomic environment and the complexities of their enterprise transformation. Despite these challenges, the company insists on maintaining a disciplined approach to deal closures, avoiding rushed or unfavorable pricing concessions to ensure long-term value.

Strategic Shifts and Enterprise Focus

One significant shift has been the winding down of their server offerings over a 3.5-year period, successfully migrating users to cloud and data center environments. This move aligns with their strategy to deliver the ultimate Atlassian experience via the cloud, offering enhanced capabilities such as analytics, automation, and AI. They are also intensifying their focus on enterprise sales, aiming to deepen relationships with large customers who view the cloud as their ultimate solution.

Guidance and Future Outlook

For FY '25, Atlassian expects total revenue growth of 16%, a reflection of their conservative outlook amidst ongoing economic uncertainties. The company aims to accelerate growth in FY '26 and beyond, targeting a 20% compound annual growth rate over three years. This outlook is supported by ongoing investments in enterprise-grade cloud solutions, AI advancements, and the expanding adoption of their platform across large enterprises.

Leadership Changes

The earnings call also marked the last for co-founder Scott Farquhar, who will continue to contribute as a Board member and special advisor. His departure is part of broader leadership transitions aimed at sustaining Atlassian's growth trajectory, including the search for a new Chief Revenue Officer to spearhead their enterprise sales strategy.

Conclusion

Atlassian remains a robust player in the software market, continually evolving and adapting to meet the needs of their growing customer base. With strategic initiatives focused on innovation, cloud migration, and enterprise sales, the company is well-positioned to navigate current challenges and capitalize on future opportunities.

Earnings Call Transcript 2024-Q4

[Operator]

Good afternoon, and thank you for joining Atlassian's Earnings Conference Call for the Fourth Quarter 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 Fourth Quarter and Fiscal Year 2024 Earnings Call. Thank you for joining us today. On the call with me today, we have Atlassian's co-founders and co-CEOs, Mike Cannon-Brookes and Scott Farquhar, and Chief Financial Officer, Joe Binz.

Earlier today, we published a shareholder letter and press release with our financial results and commentary for our fourth quarter fiscal year 2024. The shareholder letter is available on Atlassian's work life log and the Investor Relation section of our website, where you also find other earnings-related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains management's insight and commentary for the quarter. So during the call today, we'll have a 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 materials or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management's beliefs and assumptions only as of the date such statements 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 financials is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled Risk Factors in our most recently filed annual and quarterly reports.

During today's call, we will also discuss nonfinancial metrics. These non-GAAP financial metrics are in addition to and are not essential for or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the Investor Relations website.

We'd like to allow many of you 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 Mike for opening remarks.

[Michael Cannon-Brookes, executive]

Thank you all for joining us today. As you've already read in our shareholder letter, FY '24 was an incredible year for Atlassian, and we're proud of all we've accomplished in a challenging environment. We generated $4.4 billion in revenue, over $1.4 billion in free cash flow and surpassed 300,000 customer. We continued our steady drumbeat of innovation in FY '24, shipping Atlassian Intelligence, compass and virtual agents for Jira Service Management into general availability. We also welcomed Loom into the Atlassian family and introduced Rovo and announced an entirely new era for Jira.

We closed out our 3.5-year journey of winding down server and successfully migrated millions of users to cloud and data center. As we continue to partner deeper with our data center customers, they understand that cloud provides the ultimate Atlassian experience with the power of our unified platform and innovations such as analytics, automation and AI.

We've continued to deliver enterprise-grade platform capabilities to this cloud, unlocking data residency in 6 new regions, increasing the scalability for Jira to support up to 50,000 users on a single instance and achieved FedRAMP in process designation, a critical milestone in supporting the U.S. public sector, Atlassian Cloud. These and more are helping pave the way for some of our largest and most complex data center customers as they map out their journeys to cloud. We now have over 500 customers spending over $1 million annually. The progress we've made and the momentum we are seeing in the enterprise segment, reinforces our conviction in our strategy to build and deliver solutions that help solve our customer's toughest team collaboration challenges.

We have a massive serviceable addressable market opportunity across our 3 customer including a $14 billion revenue opportunity just within our existing customer base alone. And we are more excited than ever to seize this opportunity and accelerate our path to surpass $10 billion in annual revenue.

Lastly, this is Scott's last earnings call. It is truly impossible to put into words the impact that Scott has had on me on the thousands of employees, hundreds of thousands of customers and at Atlassian as a concept and as a company,over the last 23 years. It's been an honor to the Atlassian side by side him over the last 2 decades, and I look forward to his many continued contributions to the company as a Board member and in his special adviser role. Thank you, Scott.

And with that, I will turn it over to him.

[Scott Farquhar, executive]

Thanks, Mike. I look back on the last 23 years, we've met prior about what we've built in Atlassian. And we've always believed that only through teamwork can be achieved as seemingly impossible. It's one of the 2 decades building products that enable our customers to do just that. Our products powered teams at the forefront of innovation for companies leading the next stage of space exploration to those developing ground baking medical discoveries that are saving lives. And it feels like we're only just getting started.

Atlassian is incredibly well positioned to see the massive opportunities in front of us across our 3 markets and in enterprise AI and of course, delivering innovation across the entire product portfolio. I'm not bullish than ever about our strong position to grow and deliver parallel value to our customers.

Before I close out, I want to take a moment to thank every single lesion around the world, past and present. People say this pace wouldn't be Atlassian without Mike or I, but the truth is Atlassian wouldn't be what it is today without each and every one of you. You drive emission forward and your dedication on wavering to then pie and make me incredibly proud. I look forward to seeing Atlassian continue to pursue a mission of unlisting potential every team, albeit from a slightly different seat.

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 really remarkable career. It's been a real pleasure working with you over the years. So coming out of a real building year in FY '24. The FY '25 guidance for total revenue of 16% is disappointing to investors. We see that in the aftermarket reaction. Do you guys remain confident in the longer term 20% plus growth over the next 3 years. Can you help us bridge that equation? Where do you guys garner the confidence for like the 20% plus growth longer term, what are the parts of the equation that are going to turn on, if you will, as we go into -- FY '27 that we're not seeing today that give you guys the confidence to make that statement with today's results?

[Joe Binz, executive]

Thanks, Keith. This is Joe. I'll start, and then I'll pass it over to Mike for more color. Despite the macroeconomic uncertainty and the execution risks related to the evolution of our market motion, we believe FY '25 will set us up with a strong foundation to accelerate growth in FY '26 and beyond. And keep in mind, mechanically, there are a number of difficult prior year comparables in FY '25 with the end of Server Mats revenue and event-driven purchasing around the server end of support. Longer term, fundamental growth drivers for FY '26 and beyond are very consistent with what we shared at Investor Day back in May. So it starts with the opportunities we have in our 3 large markets, those being software, service management and work management. Those are collectively growing at a solid double-digit CAGR. We have a $67 billion addressable market opportunity with $14 billion of that in our existing enterprise customer base alone. And then from there, we can drive growth in several ways.

We believe migrations from data center, given the size of the installed base will continue to be a driver of cloud revenue growth in FY '25 and beyond. And we're investing and working hard to enable those customers to migrate to the cloud. In addition to migrations, we have paid seat expansion within existing customers as we move to enterprise and enable more wall-to-wall adoption, then our opportunity to cross-sell additional products like Jira Service Management, Jira Product Discovery, Compass, Loom and Rovo. Over 300,000 customers is another great opportunity.

We have the ability to upsell to premium enterprise addition to our products, which is another significant growth driver. And then there are other drivers in the model like pricing and new customer growth, which is not a significant or term, but is a longer-term growth driver.

And then lastly, with AI, I'd say we believe we have a unique and differentiated position with data graphs around high-value roads, and there's a lot of long-term opportunity in that space as well. So overall, we continue to expect to drive healthy revenue over the next 3 years in cloud. And from a data center perspective, that customer base is primarily composed of large customers with very high logo retention. So growth from the customers that remain on data center will be driven by pricing and seat expansion and cross-sell.

So overall risks and tough comparables to navigate in the short term, but big opportunity in fundamental customer demand are there long term, particularly in the enterprise customer segment, as you can see in the momentum and traction we're getting there. We cited we have over 500,000 customers spending more than $1 million with us, which is up 48% year-over-year. So we feel really good about that. And then I'd just say, overall, we remain confident as ever in our ability to deliver revenue growth in excess of 20% compounded annual growth rate over these few years. Mike?

[Michael Cannon-Brookes, executive]

Look, I think Joe those answers that incredibly well, Keith. The -- look, if I take his nailed the math there, right, we are incredibly confident in our 20% figure we've given over the next years and continue to be so today as we were at the Investor Day for all the reasons that he stated and how the math plays out. I will say from a qualitative point of view, the more customers they spend time with, the more confidence I have in that number from -- on the non-math side, I suppose. Most of the large customers I speak to, in fact, all of the large customers I speak to, would tell you that cloud is a WAN not an for them. So that gap between the server migrations ending and the data center migration is picking up pace, that we have high confidence that will mature through in our engineering road map and in the deliveries we have in cloud and how that's resonating with the customers in the stories to tell.

Secondly, increasingly, AI analytics and their platform and mentioned by those large customers as reasons for moving as well as our cloud delivery. So our proven ability to deliver as we saw with FedRAMP process this quarter is resonating with those larger customers. As is the new products that Joe mentioned some of -- so in Loom, Tiraproduct Discovery, Rovo, -- we have the best slate of new products in the nascent phases that we've had with very high customers, and it's when you do qualitative checks with customers. All of those exist in the cloud and all of those are going to drive that migration journey.

Lastly, I have a huge confidence in our long-term ability to evolve and adapt as a business. We've shown that over more than 2 decades. We're in one of those adoption places at the moment as we deal with the enterprise transition, I think, jointly. And that evolution capability that lasts will continue as we help those largest customers to go increasingly wall-to-wall across their enterprises. So huge bullishness for me that we'll hit those numbers that we've given out.

[Operator]

Your next question comes from Michael Turrin from Wells Fargo.

[Michael Turrin, analyst]

Objectively, 30-plus percent subscription revenue growth, 30-plus percent free cash flow margin, not something we're seeing a lot of across software. But in the spirit of the question is, Joe, you guided proud to 32% for Q4. The reported number came at 31%. So just hoping you could provide some context around what drove the delta in Q4? And maybe just help us frame the approach to cloud guidance for fiscal '25, if there's anything additional you're taking into account, obviously, a lot of moving pieces and factors to consider. So any compare and contrast with the approach to guidance here versus prior periods is helpful.

[Joe Binz, executive]

Yes, awesome for the question. You're right, revenue was up 31% year-over-year in the cloud in Q4 that was slightly below our guided range of 32%. The variance to our there was driven by 2 factors: One is the timing of high-touch enterprise deals, which landed later than expend in the quarter and slightly lower-than-expected revenue from data center migrations. So I'll take each one of those and dive in. From a deal flip perspective, deals closed and billings landed in the quarter just later than we expected, and that impacted revenue recognition. There were a couple of factors that drove that. The first is what I'd characterize as the evolution of our high-touch go-to-market motions. We are driving larger, more complex deals that include more products and require more approvals. And in some cases, we're targeting large complex migrations and all that adds up to longer sales cycles than we anticipated.

Second, we always take a very disciplined and long-term oriented approach as we think through pricing and concessions on these deals. So we're not deadline driven. We don't do anything unusual or natural deal economics to close a deal at a certain time. And we're willing to be patient and wait for the right deal for both the customer and for us, and that's what we did this quarter.

In terms of the migration miss, overall migrations to cloud were slightly lower on an absolute basis in Q4 versus Q3, and you'd expect that following a catalyst like server and to support with migrations from data center slightly lower than our expectations, as you highlighted. The driver there is the complexity of these migrations. Data center customers are our largest customers with the most complex environments to migrate. Very different from the 1- to 2-day migrations that we can do with our smaller customers. Further, many of these customers when they do migrate, do so taking a hybrid approach over time. And then lastly, many of these data center customers recently migrated from servers. So there's going to be variability in the pace of these data center migrations quarter-to-quarter. And overall, our customers are clear that their ultimate destinations in the cloud, as Mike talked about, it's the best secure experience, and it's where all of our R&D and product innovation is pointed, so they can see the value we're delivering there and have a plan to get there. So it's just a question of what the timing looks like over the next several years.

The last part of your question was on the approach to guidance in FY '25. And what I'd say here is we have taken a different approach to our guidance this year and that we have taken a more conservative and risk-adjusted view of our revenue outlook entering the year than we did a year ago. We believe this is prudent given 2 factors. First is the uncertainty we see in the macroeconomic environment; and second is execution risks related to the evolution and transformation of our enterprise go-to-market motion. And so -- our guidance balances the trends we've seen over the last year with the uncertainty that is out there, whether it's macro related, or changes we're making inside the company. And it incorporates the assumption that macro gets worse as us risks are realized to form a more risk-adjusted and prudent view entering the year than we did a year ago. So hopefully, that color helps in terms of what we're thinking about from a guidance perspective.

[Operator]

The next question comes from Ryan MacWilliams from Barclays.

[Ryan MacWilliams, analyst]

Maybe for Mike, I want to hear your thoughts on what's next for your go-to-market organization like alongside a new head of sales. Does it make sense to go out and also hire more seasoned enterprise sales reps into Atlassian? And how is the sales team so far transitioned from the migration opportunity into selling into more enterprises or selling new Atlassian products at this point?

[Michael Cannon-Brookes, executive]

Yes. Ryan, I can certainly talk to that. It's a great question. Maybe let me start from the high level. I think I would categorize this as another evolution in Atlassian go-to motions overall. You've seen us do this before many times, and Atlassian is a pretty tough history of adapting to the environment, adapting to technological advancements like AI, but also changing the way we service support and make successful our customers. Our current go-to-market motion engine is obviously highly successful, right? We have a highly effective flywheel that serves the SMB and our enterprise customers as well, resulting in best-in-class efficiency and the financial profile that you're all aware of. And has given us a huge volume of customers and an enviable margin and cash flow profile.

We have made a series of evolutions in go-to-market, I would say, over that 20-year period. When we introduced data center, we added enterprise advocates. And obviously, we've shown a history of building a significant business in the data center world. When we added cloud, we learned to sell and migrate and support customers in the cloud and built a very significant cloud business over time. You've seen us do that. And then more recently, as we added additions in premium and enterprise additions in the cloud. We've added the muscles to be able to upsell customers and explain the success of their moving. And we have proof points of that in a strong adoption of premium and enterprise. So a series of evolutions we've had over time gives us confidence that we can continue to evolve and adapt as we have done.

As we've talked about the more than $4 million revenue opportunity in our existing base. We spent a lot of time evolving R&D over the last 3 or 4 years to better serve the enterprises in the cloud, and we've got great proof points of delivery there. And now we're continuing to evolve our go-to-market motion to sell, support and service those largest enterprises. As we said, we've got more than 500 customers that are spending north of $1 million, and that's -- we think we can continue to grow that portion of the customer base strongly and that evolution and that desire to keep changing and adapting and improving is one of the things that keep Atlassian at a seen a very special place to work. I do think it's worth saying at the highest levels, too. It's important that what you can expect not to change in that evolution.

First, I would say there is our discipline as a company. We've always prided ourselves on making economical decisions, understanding the deal economics in the enterprise as we do now better than ever before and being continually capital efficient as we grow that, as you've seen us do. Secondly, the long-term focus doesn't change. Part of this evolution is looking forward multiple years and seeing how that enterprise part of our business is going to continue to grow and evolve and how we serve those largest of the of the Fortune 5000 with incredibly complex needs and our opportunity to do so and to help them out in their businesses.

Lastly is maintaining a flywheel of our primary land motion for all customers, right? From the SMB customers in the Fortune 500,000 to the enterprise customers in that Fortune 500 and Fortune 5000. 2.5 of the enterprise focus is additive for our SMB growth motions are incredibly important and efficient number will remain so for the business as we keep evolving.

Now to the second part of your question, look, we will -- we continue to focus on the talent levels experience we have as well as growing talent within our business. There are a lot of areas that we continue to grow as we strengthen our go-to-market muscles to focus on the needs of our largest enterprise customers. We have a proven ability to manage multiple go-to-market machines, I would say, and thread them together carefully, and I'm sure we'll continue to improve and grow that. But really excited about this evolution pricing.

[Operator]

Your next question comes from Arjun Bhatia from William Blair.

[Arjun Bhatia, analyst]

If we can touch on the FedRAMP, the opportunity. It sounds like you're making progress there. I'm curious how long it might take before you can unlock some more federal deals in cloud? I assume you have a lot of existing federal customers on D.C. Are those customers that you can start to migrate over to cloud? Or is there still a little bit of a process to play out before the buying cycle occurs here in calendar Q3?

[Michael Cannon-Brookes, executive]

In, I can certainly take that. Look, there's no doubt we have a huge volume of very large government customers in data center. And I would also say we have a large number of customers who service government entities who are also in data center who may not necessarily be government entities themselves. But obviously, in light of working with the government need FedRAMP or are easier for them to do businesses if they have FedRAMP capabilities. So it's not just about the government, the businesses around the government as well, which is a very large segment, as I'm sure you're aware.

We have continue to work with a lot of those customers as we've developed our FedRAMP capability to keep them on the journey and aware of where we're at. And I will say our cloud room at delivery is a really important point there. The last couple of quarters, we've hit 100% of items on our road map at or before the time and this resonates with customers. So you can look just as they can at our future cloud road map that is online to talk to compliance, to scale, to performance and to all the other things that we're building into that road map.

We have a series of customer examples who have stated as they've moved to hybrid ELA. I can give a very large global aerospace and defense company. It's a sort of 20-year customer of Atlassian. They signed a hybrid ELA quarter for the next couple of years and stated that FedRAMP and the inroads we've made in cloud security on the road map are call out reasons as to why they signed such a deal and move forward. So that gives us great confidence as we move to the in-process designation of FedRAMP, but also IPR and all the other compliance is that we've shipped as well as data residency and gives great confidence that we can move there. And obviously, be way okay as well, bring your own key encryption capabilities for this customer segment.

So that for data center customers migrating. There is a multiyear journey for a lot of these very large customers. Again, the reason that, that company so hybrid ELA is to enable them to start moving some workflows and loads to the cloud as the workflows and loads they have on-premise will continue there. And they'll move into a hybrid state for probably a multiyear period before being entirely in cloud. And we need to do that lets them test and learn about cloud. It will and see the strength of cloud, and they will move that over time.

I think that's a pattern we'll see with a lot of these larger start center customers that can have 10 hundreds, sometimes even thousands of Grand Confluent service running across their enterprise. This is a huge ability. This latent demand for Atlassian products and latent demand for cloud to kind of think about it that way, is a big strength of Atlassian, over the next few years. And I'm confident in our ability to unlock that and Sedran will be a huge unlock for government and government adjacent customers.

[Operator]

Your next question comes from DJ Hynes from Canaccord.

[Lucas Morison, analyst]

This is Luke on for DJ. So I was hoping to get some insight into the response you've received from customers since you folded JW into Jira. Just anything you've heard from both technical and non-technical teams regarding that change? And whether it's been a positive from a marketing and messaging standpoint in terms of driving interest across those 2 audiences?

[Michael Cannon-Brookes, executive]

Luke, certainly, great question. I can say categorically, it's been a positive from customers' point of view. That one is a very, very easy answer. The system of work that Atlassian has continued to communicate and being sharper on over the last few quarters is very resonant with customers. The reason is a lot of our customers are incredibly technology-driven companies. They realize that technology is there. Core competitive advantage going forward in their business, whether they're building cars or rockets or fantastic or health care advancements or whether they're building databases, right, whether a technical or a nontechnical company, they realize the technology is their core fundamental advantage. And in doing so, they realize that getting their technology teams to work closely to their business teams and to exchange data back and forth and to be able to work in a comment tools and content patents is incredibly important for them to win in that technology-driven era.

That's one of the reasons why, although Jira Work Management was doing incredibly well as a product, and we were very bullish on it. We took the decision to merge the 2 into a single Jira to allow technology and nontechnology teams to work together. That has been incredibly well received by customers. It allows them to achieve those goals that they have, right? We have a series of stories where it also leads to 2 factors for Atlassian. Firstly, it allows the customer to consolidate on Atlassian of other work management tools because they have a singular cloud platform. And in the era where consolidation is incredibly important, that timing works very well for us and for them. We can talk to a company like Rivian that took 5 different work management tools and consolidate on the Atlassian Cloud due to the combination of Jira Work Management and Jira Software, save them over $2.5 million annually and expanded their use cases for Jira and to many other business teams.

And secondly, for Atlassian, it allows us to expand our seat count because the technology teams within an organization or a relatively small proportion, depending on the organization be from 5% to 25% or 30% organization. The other 95% to 70% of the organization is business teams that still have workflows and project capabilities they need. And Ravin is a good example where we've seen that where we've got both consolidation and seed expansion for Atlassian due to the system of work, and the platform that underlies all of our products. So incredibly good customer reception from this move. And as we continue to do Atlassian over the long term, it's about listening to customers and understanding what they need and trying to deliver that in our product portfolio, in our R&D and also in our go-to-market motions and how we explain to customers what it is that we do and help them with.

[Operator]

Your next question comes from Fatima Boolani from Citi.

[Fatima Boolani, analyst]

Joe, this question is for you. Earlier, you were very explicit in the variant assumptions you are taking into consideration for the book of business for fiscal '25 and you need a specific reference to execution risks due to some of the enterprise go-to-market motion changes that you're making. I was hoping we could go a couple of layers deeper into what specific variables or assumptions you're considering or flexing to kind of arrive at that conclusion? And relatedly, changes in the sales organization and kind of the departure of Kevin, how is that flowing dose stream and the way you're thinking about just productivity and quota attainment and things like that. I'd really appreciate some more granularity.

[Joe Binz, executive]

Yes. Thanks for the question. I'll keep it at a fairly high level in terms of the execution risk we see in that transformation or evolution of our go-to-market enterprise sales motion. As you pointed out, there is leadership transition there. And so that's always something you want to keep in the back of your mind as you think about forecasting over the next year. And then I would just say it's a nascent capability that we continue to build and develop over time. And we like highlighted the fact that we've been investing in the space. We have a foundation. But as we continue to make more and more progress, we're going to continue to evolve and build that. And whenever you're doing that, that involves risk in our execution against that level of change.

So from a high level, those are the 2 big factors, and I'll let Mike fill in fill in the details on

[Michael Cannon-Brookes, executive]

Yes. Look, Fatima, great question. I want to -- I guess I want to start from my point of view, but nothing with gratitude and thanks for Kevin and the role he's played right. He's been an incredibly dedicated leader of our sales function for a number of years, has built an incredibly strong sales leadership team and has set up the foundation for us to make this continued transformation and evolution. So just have to call them out with great thanks from myself and from Scott in that context.

As I said, we are searching for a transformational CRO, we can continue to drive the next phase at ever-increasing scale. That search is well underway. And in the short term, look, I personally led and built the go-to-market engine we have today for our first 10 years, I guess, and continue to be incredibly heavily involved there and with the customers. Also, we have an incredibly strong executive team. I would argue the strongest we've ever had across the business. So incredibly confident we can lead the business strongly through that evolution. I think Joe has spoken well to the prudence of our guidance in light of this transformation, but more in light of the other things he mentioned the other factors that go into that there. And I think you've seen from us prudence and careful thought as well as hopefully openness and explanation about what it is that we are going through as we focus on the long term.

And lastly, I would reiterate our deep belief and confidence in the vent multiyear revenue CAGR that we've given out at Investor Day, and we would maintain those targets, both on the revenue side and on the return to historical operating margin side.

[Operator]

Your next question comes from Brent Thill from Jefferies.

[Brent Thill, analyst]

Joe, as you know, the central question investors are asked is the cloud guide and ultimately, are you putting a little more conservatism into this forecast to give yourself more wiggle room. It's been -- I know it's been a challenging thing to forecast, given a lot of different factors. But has your approach changed here? Is anything change in the assumptions to give investors more confidence that they can really believe in that number.

The second one was just a follow-up on 2 months ago, you guided 20% top line, your guidance [ 16 ] Should we think differently now about the long-term growth? Or is this more of a tactical pit stop and you still believe in '20 over a period of time?

[Joe Binz, executive]

Yes, Brent, thanks for the question. In terms of the revenue guidance, I'll just reiterate what I said earlier in terms of our approach, being a different approach to our guidance this year. It is a more conservative and risk-adjusted approach. And the reason and the drivers for that are the risks and uncertainties that we talked about. One is we see uncertainty in the macroeconomic environment. And second, the question earlier, we do see execution risk related to the evolution and transformation that we're undergoing on the go-to-market side. So we've taken all that into account. And the net result of that is we have a more risk-adjusted and prudent view this year going into the year than we did last year. So we have a -- 3-year 20% plus compounded annual growth rate on revenue. We talked earlier about the drivers of that. Nothing has changed in the last 3 months since Investor Day when we made that. We continue to reiterate our confidence around that, and we talked earlier on the call about the drivers behind that.

[Operator]

Your next question comes from Alex Zukin from Wolf Research.

[Aleksandr Zukin, analyst]

I think maybe it would be helpful to just unpack kind of similar to how you at least commented in the letter on the margin side around the headwinds that investors should -- or the tailwinds that investors should recall that were onetime in nature on operating margins in fiscal '24, such that ex that the fiscal '25 margin guide is actually flat? Similar to that framing, if it's possible just to understand. If you look at the guide that you gave for 16% total revenue growth, but that's in light of these onetime tailwinds of end of server conversion because I think if I adjust for that, the guide is actually closer to '19. So just help us frame that because that's obviously not going to recur. And presumably, it appears from your commentary that the guide is more incorporating timing of certain deals closing on the enterprise side, maybe migrations on the enterprise side, that's informing the conservatism. But just maybe help better understand that a little bit.

[Joe Binz, executive]

Yes, Alex, this is Joe. I'll take a shot at that. I think first of all, you started from an operating margin perspective and what are the factors there that are driving the lower year-over-year operating margin. As you point out, we expect our non-GAAP operating margin to be 21.5%, approximately in FY '25. That's about 200 basis points lower than FY '24. Keep in mind, as you pointed out, our FY '24 non-GAAP operating margin benefited from the significant outperformance in data center and marketplace revenue related to server and to support in H2. That impact was about 200 basis points. And so when you normalize for that impact, our FY '25 operating margins will be roughly flat year-over-year.

In terms of the cloud revenue deceleration and the comps there, we do believe cloud revenue growth will decelerate in FY '25. And the primary driver is we expect less contributions from server migrations now that we're past server and to support. And while data center migrations will increase, they won't make up for the -- migrations. Given the migration path for many of those customers, as we've talked about earlier, will play out over a multiyear period. with many evolving hybrid deployments. We've also incorporated, as you pointed out, prudent assumptions to account for the impact of worsening macroeconomic environments and execution risks in our enterprise go-to-market motions. So those are some of the factors that are driving that year-over-year in cloud revenue.

Now having said that we pointed out in the call, we remain optimistic long term and expect cloud revenue growth to accelerate in FY '26 as we lap the drag from server and to support and drive improving seat expansion, cross-sell of additional products and upsell to premium enterprise additions of our products that we talked about earlier.

[Operator]

Your next question comes from Gregg Moskowitz from Mizuho.

[Gregg Moskowitz, analyst]

I had a follow-up on a couple of the go-to-market questions from earlier. Mike, you're looking, as you said, for a new CRO with expertise and leading enterprise sales transformation. But how do you define an enterprise sales transformation? And more specifically, how much do you foresee your go-to-market changing Atlassian, both in fiscal '25 as well as over the longer term?

[Michael Cannon-Brookes, executive]

Gregg, how much is an interesting question. Look, I would say that we are -- continue to be a very long-term thinking company. And what I'd say that, I mean, at Investor Day, we talked about our R&D spend as a percentage of revenue moderating when we gave our long-term targets and our sales and marketing spend increasing from roughly that sort of 15%, 16% range, moving north of that. So you can see implied in that, that there'll be increasing spending, but I would argue in a cautious and careful way. And we're very good at the capital efficiency, the calculation of where the ROI on that spend is. And it's a relatively moderate increase in spending, especially when you compare it to our comps in the market and other companies, right?

We'll still be -- after that transition comparatively efficient on sales and marketing to most other software companies and still comparatively high spending on R&D because we believe that's where our fundamental advantages are. So Think about this as an evolutionary and adjustment in that manner. Now the transformation is about how we continue to take those 500 customers spending more than $1 million. And the huge lighten demand we have in data center and increasingly build deep partnerships with some of our largest customers in how we are helping them transform their businesses. This is a part of our evolution, right?

I've talked about when 15, 17 years ago, when we started the data center business, we were talking about moving $5,000 customers to be $50,000 customers. And now we're along that nowadays, but this is something that we are familiar with the history of the evolution that we've had. And I think it's a very smart example of how Atlassian continues to evolve through the years in ways that benefit our customers. In this case, we're looking at our largest customers that are -- when you speak to them, they're betting incredibly hard on Atlassian. They think that we are transforming the way that their company works. They want to roll out to ever-increasing numbers of scale, and they want to understand the philosophies of how we were there and build a partnership across our portfolio of products. That's what we mean by that enterprise transformation and how we sell support and ultimately make successful those largest customers.

Lastly, I will point out that we believe this is additive to our model, not a swap or a switch. We have a great capital-efficient flywheel in the product-led growth motion that we have at ending large numbers of SMB customers, but also landing in those enterprise customers, which is what makes the enterprise motion more efficient for us than other companies. So they work together in

[Operator]

Your next question comes from Kash Rangan from Goldman Sachs.

[Kasthuri Rangan, analyst]

So Mike, a question for you with these transitions can be very hard, certainly in the goal is to come out more successful as a company. And clearly, you're on the way. As you've come out of the transition, what are the lessons learned? And how can there be further tweaks to the product strategy, go-to-market. I guess we all learned from the most difficult challenging times and we've come out mostly ahead. So what are the things that you have learned that you're going to adopt to the strategy company going forward? And also, from a bandwidth perspective, you're in an enviable position. You're now twice the CEO that you were before with Scott, of course, he's on the Board now, and then you're looking for a CRO. I mean there are some big shoes to fill. How -- and you talked about Joe very little quant talked about the what, how the different levers that exist in place to get the company to potentially accelerate. And one of the very first questions I had. But I'm more curious about the how you get there? What are the things that are being done internally differently is I know it's the long rambling complicated question, but I just wanted to hear you out a little bit more in depth as you start through all this stuff.

[Scott Farquhar, executive]

Sure, Kash. I'm guessing I'm going to take that one. Look, I'd say a few things. Firstly I think I would start with saying we have an incredibly strong executive team. So a lot of the implication of your question is this all going to fall on my shoulders. And there's no doubt ultimately accountable does, I'm very comfortable with that. But at a high level, look, we have a great executive team. We have a great sales leadership team at the moment, and we are well familiar with this evolution and transformation motion and having it play out over the quarters and the years. This is not something that starts on July 1 of this quarter. This is something that's been going for a while. As you can see, we have more than 500 customers north of $1 million. This is not an entirely new motion for us, right? This is an evolution. There's nothing broken here, right? We're just continuing to improve and grow and stretch as we have done for a long time. The mix shift of being more and more additive in the enterprise, as we said, have come on the back of a huge amount of R&D investment into everything from data residency and BYOK to scale in the cloud to FedRAMP. And now we believe we have the opportunity to increase our footprint in that enterprise customer base in all of our customer markets, I would say, from software teams. And in ITSM, you've seen how strong the Jira Service Management business is at the moment and through work management and collaboration as the system work rolls out and we get a hard footprint.

So I think we feel the opportunity is there, and we're going to go after that. I think when you talk about what lessons have we learned look, -- we continue to see great sales execution as we go through. 1024 was a huge event for us in terms of a lot of things, product launches, but also in terms of pipeline builds, it was our largest enterprise event that we've ever held and confidence that comes from those customers often informs us in making these DC solutions and movements.

I would say that our strength as a company has always been our ability to learn and evolve. I'm less worried about personal workload and personal then looking at the team of 10-odd people we have on the executive team, I guess, you'd say, and through the 1,000 leaders we have through the business and the 12,000 or more Atlassian staff and our ability as a collective to go after this mission. I feel incredibly confident that we can get to that and do that, and that's what we intend to go to.

[Operator]

Your next question comes from Nick Altmann from Scotiabank.

[Unknown Analyst]

This is John Gomes on for Nick Altmann. You guys outlined some interesting examples at the Analyst Day in terms of the product adjacencies with Loom and the core. So now that Loom has been part of a lag for a couple of quarters now. Can you give us a better sense of cross-selling traction there. And as it pertains to FY '25, do you have any goal posts for how we should be thinking about the Loom contribution?

[Joe Binz, executive]

Yes. Thanks for the question. I'll take part of that, and then Mike will follow on. You asked about the impact that Loom will have within our overall revenue and operating margin guidance for FY '25, we expect Loom to have about 1.5 to 2 points of impact on FY '25 cloud revenue growth for the year. And consistent with our prior expectations, we expect Loom to be slightly dilutive to FY [ '25 ] operating margins. And I'll turn it over to Mike on the cross-sell.

[Michael Cannon-Brookes, executive]

I would say a few things on loan. Firstly, what an incredible product, right? The customer reception I would start there is fantastic. It is saving our customers a lot of time and meetings, and it's just a fantastic way to communicate, if any, you haven't tried it, I would encourage you to do so. We truly believe it can be transformational to the way that organizations work, the way that they work through video in an asynchronous manner and an increasingly distributed workplace that we live in. So our bullishness of the product and the product sector is still increasingly -- is still very high. .

Secondly, as a product, it continues to sell very strongly independently of Atlassian. And that's always the first step. I would say we've had a small amount of top spend to the business in terms of how it actually sells and Lumi continues to sell and drive a change in land in and of itself as our ability to and video, just as you would add a document rings true both with customers and also in the delivery part.

We are continuing to integrate lean into our business practices as we do, so into the Atlassian Cloud platform into a broader sales and marketing execution machine, that integration does take some time. We get better at it with each vision, but there's sort of a 2-stream effect there. One is the product continuing independently to sell strongly by itself. And secondly is the integration into our broader platform and the role it plays in the system of work.

Maybe lastly, I would say that the team -- the lean team that's joined us and the additional aluminates we've added to that continue to deliver a very strong product road map. If you look at the recent launches in Loom around integrations with Duran Confluence, but also in Loom -- continuing to work on you can just since added video. I think the product delivery there is going to continue to be important as we build the momentum in the Wind business.

[Operator]

Your next question comes from Keith Bachman from BMO.

[Keith Bachman, analyst]

Joe, I wanted to direct this to you. I appreciate your comments on being a bit more conservative on the outlook. And I wanted to tie that to some of the conversations we had in Vegas. And particularly, as we think about the outlook for the year, in cloud and data center. Just how are you thinking about 2 variables that would contribute amongst others, but in particular, as it relates to seats and pricing. How are you thinking about what the contribution from those in order to realize the targets that you've laid out for the year?

[Joe Binz, executive]

Yes. Thanks for the question, Keith. From a paid perspective, our expansion rates in Q4 were consistent to Q3. That's an encouraging sign. But one data point is not a trend to make. And so we are assuming that we'll see continued pressure in paid seat expansion in FY '25. And that speaks to the risk-adjusted approach we took around macroeconomic. In terms of pricing, we continue to expect to have pricing increases throughout the year. That will be a driver of cloud revenue growth that has been in FY '24 and prior. And so you should expect to see a similar impact in FY '25 going forward.

[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. Appreciate all of your thoughtful questions and continued support. I guess I just want to add a small note on a personal level at the end here. It is Scott's last earnings call, and you've all spread in some questions today, which I'm sure is very tail for. One of -- when Scott sits down with graduates when they joined Atlassian with any new staff members, one of the things he said for more than 2 decades now, is it the one thing you want to leave them with is that they should leave Atlassian a better place than they found it. They should not treat it as a finished object, but rather a continued construction project that gets better and better. And that if they leave the company better than they founded, and that's the only thing they walk away with that we will all benefit. And I said that because I think if there's one person who's left at that's better than he founded it is Scott. And on behalf of the leadership team of the 12,000 current Atlassian and the 20-odd thus know how many Atlassians there are past and present add together. We all owe a huge set of gratitude and thanks for leaving Atlassian better than he found it is an underestimation for just a magical place to work and a fantastic and different company. And for me, personally, in from everybody else. I thank you, Scott for everything you've done to contribute to the business we have today and the place we are lucky enough to get to work a day and for a long time to come. So thank you very much for me. We'd love to do a lot to wish you the best in all future endeavors. With that, have a great day, everyone, and have a kickass weekend.