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Earnings Call Analysis
Q4-2023 Analysis
Atlassian Corp
The journey for customers using our server products is reaching an important milestone as support will conclude in February 2024. With this deadline looming, the company is primarily focused on facilitating customer transitions to cloud or data center offerings. Yet, there's a recognition that this period brings some uncertainties, with quarter-to-quarter variability likely as remaining server customers determine their migration paths. Historical trends observed in FY '23 regarding migration volumes and destinations are expected to persist into FY '24, but more detailed assumptions and guidance on this server end of life dynamic will be shared in the Q2 guidance of the next quarter.
The company is well-positioned to support customers in making the best migration decisions for their unique needs, providing strong incentives to adopt cloud solutions. However, recognizing that some customers may not be ready to move to cloud, the data center offering remains an accessible, on-premise alternative. The trend is that customer migration choices are aligning with the patterns seen over the past year, suggesting predictability as we approach the server end of support.
The company's growth, particularly in cloud services, maintained the positive trajectory of the past, with migrations contributing approximately 10 percent to the total growth, consistent with the trends in FY '23. The fourth quarter saw exceptional performance, driven by a spike in June purchasing activity, as customers sought to benefit from the loyalty discount program before its expiration. This led to an increased number of deals and higher contract values, bolstering the migration momentum, seating expansion, and upsell to premium and enterprise product tiers across both cloud and data center offerings. The server business also exceeded expectations, credited to vigorous renewals and heftier deal sizes, complementing the overall financial prosperity.
In light of the successful cloud migrations and the upcoming end of server support, the company experienced a leadership transition with Cameron stepping back at an opportune moment. The leadership change comes amidst strong operational performance and is not anticipated to disrupt the company's trajectory, thanks to a solid league of leaders guiding the sales organization. This continuity in leadership underscores the company's steadiness during strategic shifts.
Atlassian Intelligence and AI are identified as significant opportunities, with the belief that they will revolutionize software development by alleviating supply constraints. The company's data-rich environment, which spans across its products and third-party integrations, is invaluable for a text-based business targeting collaboration and knowledge workers. Embracing AI reflects the company's vision of delivering impactful value changes for customers, solidifying its role as an innovative leader in the software industry.
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Good afternoon and thank you for joining Atlassian’s Earnings Conference Call for the Fourth Quarter of Fiscal Year 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Atlassian’s website following this call.
I will now hand the call over to Martin Lam, Atlassian’s Head of Investor Relations.
Welcome to Atlassian’s fourth quarter of fiscal year 2023 earnings call. Thank you for joining us today.
Joining me on the call today, we have Atlassian’s Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our Chief Revenue Officer, Cameron Deatsch; and Chief Financial Officer, Joe Binz.
Earlier today, we published a shareholder letter and press release with our financial results and commentary for our fourth quarter fiscal year 2023. The shareholder letter is available on Atlassian’s Work Life blog and the Investor Relations section of our website, where you will also find other earnings related materials, including the earnings press release and supplemental investor data sheet.
As always, our shareholder letter contains management’s insights and commentary for the quarter. So during the call today, we will have brief opening remarks and then focus our time on Q&A.
This call will include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s belief 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 financial results is included in filings we make with the Securities and Exchange Commission from time-to-time, including the section titled Risk Factors in our most recently filed annual and quarterly reports.
During the call today, we will also discuss non-GAAP financial measures. These non-GAAP financial measures are in addition to and are not a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A reconciliation between GAAP and non-GAAP financial measures is available in our shareholder letter, earnings release and investor data sheet on the IR website.
Please keep in mind that we would like to allow as many of you to participate in Q&A as possible. To facilitate that, we will take one question at a time. Please rejoin the queue if you have another question or a follow-up, and we will do our best to come back to you later in the session.
With that, I will turn the call over to Scott for opening remarks.
Thank you all for joining us today. As you've already read in our shareholder letter, we delivered a strong quarter of financial results. We closed out FY 2023 with great momentum in cloud migrations, in enterprise, and across all our three markets. We generated over $3.5 billion in revenue this year, and over 250,000 customers now power their collaboration on our world-class cloud platform.
Amidst a challenging year, we're extremely proud of all that we've accomplished. We said we play offense in FY ’23 and that’ exactly what we did. We migrated millions of users to our world-class cloud platform, we built game changing innovations such as Atlassian Intelligence, launched new products like Jira Product Discovery, delivered increased scale on our cloud platform, and unlock data residency in new locations like Germany and Singapore for our global customer base.
Working deeply with our customers, we're more and more excited about the value Atlassian Intelligence will deliver by leveraging the latest advancements in large language models, combined with each customer's unique data, and our world-class cloud platform, with our two decades of data driven insights into how teams work, we'll be able to further unleash each of our customers' potential across all our three markets.
Today, we're seeing our bets pay off and that’s strengthening our conviction in our strategy. As we enter FY ‘24, we're eager to get after those large opportunities and believe we're well positioned to come out of the year even stronger.
With that, I'll pass the call to the operator for Q&A.
We will now begin our question-and-answer session. [Operator Instructions] Your first question comes from Michael Turrin from Wells Fargo Securities. Please go ahead.
Hey, great. Thanks, I appreciate you taking the question, Joe. Given it to your first full-year guide, maybe you can start by walking us through the process there, the visibility into and confidence and framing those cloud targets for fiscal ‘24, and there's some commentary in the letter just around the proportions you're expecting between data center and cloud and just some details in there, I think it's useful to bring to the front of the call. So anything on just the signals you're watching and how the end of life event is taken into account, all very useful. Thanks.
Great. Thanks for the question. I think I'd like to start with our cloud revenue guide of 25% to 30%, that assumes the macro headwinds in FY ’23 persist into FY ’24 and that migrations from server and data center will continue to be strong contributors to cloud growth approximately 10 points. So we do expect the momentum that we've seen in ‘23 on that front to continue. The low-end of our cloud guidance range assumes continued macro weakness throughout FY ‘24, as well as some macro impact areas that have held up really well in FY ‘23, like churn, upsell and migrations.
Finally, we do expect cloud revenue growth rates to gradually improve throughout the year, driven by the easier prior year comparables that we have in the second-half of the year. Now you mentioned data center. In terms of data center, we do expect decelerating revenue growth rates in FY ‘24, driven by a few things: first and foremost, lower migrations from server following the server end of support. We do expect greater migrations from data center to cloud as we remove migration blockers and enhance our cloud offering, and then of course, data center has difficult prior year comparables in the second-half of the year.
And then finally, we expect a steep decrease in our server revenue up to end of support in February 2024, at which point we'll no longer recognize any further revenue. So that's a general outline of how we're thinking about that for next year.
Your next question comes from Keith Weiss from Morgan Stanley. Please go ahead.
Thank you for taking the questions. This is Sanjit Singh for Keith. How does, you know, one of the challenges in the last couple of quarters is sort of the screen to pay conversion. The letter suggested that was still, sort of, an impact again this quarter. Just wanted to get a -- as we go into next year, just wanted to get a sense of, what it would take to sort of reignite growth in that segment of the customer base. Is it something just a better macro, or there's things on the funnel side, the sales side, the execution side that could help create bigger rates in that part of this.
Yes. This is Cameron. I'll speak to the new customer number. So in Q4, we definitely saw, that continued downward pressure on our free to paid conversion that we've been speaking about largely through the last four quarters or so. And although we do continue to increase the total number of free customers out there in the pool and service those customers year-on-year, simply those customers are slower to take out credit card and purchase our software, which is fine. We can be patient and convert them over a longer period of time.
The bigger shift that we saw between Q3 and Q4 was actually due to something that we had full control of. As we look to our budgets, and we are very diligent with all of our budgets this year, but we really went into our marketing campaign spend and marketing campaign budgets and looked at ROI of those investments. Based on the deep dive of that analysis, we were actually able to redirect some of our top of funnel spend towards higher value, longer term customers. The result here was that we got less customers overall in the funnel and convert it to paid customers in Q4. But the customers we did bring in will be -- by the higher or longer term value, higher ROI customers for that marketing spend.
Going forward, as Joe already mentioned, we do continue to believe that the macroeconomic pressure against the free to paid will continue, but we will always be optimizing our marketing spend for the highest ROI possible. And where we see good ROI, we will put more investment behind it.
Your next question comes from Arjun Bhatia from William Blair. Please go ahead.
Hey, thank you guys for taking the questions. Maybe one for Cameron or Joe. Just as you're thinking about how fiscal ‘24 plays out, how should we think about the cadence of the migrations that are left as we approach the February end of life? And, maybe this one's more for Cameron, but who are the customers that are still left on server? Do they tend to skew smaller, larger? Anything you can give us there, would be super helpful. Thank you guys.
Thanks, Arjun. This is Joe, I'll take it first and then Cam can chime in at the end. We, as you we ended support for our server products in February 2024. Our focus there is obviously on migrating our remaining server customers to either our cloud or data center offerings, we expect that there will be uncertainty in quarter-to-quarter variability based on when and how our server customers ultimately choose to migrate. For now, we are assuming the trends we saw in FY ’23 with respect to how many server seats migrate and where they migrate to. We'll continue in FY ’24 directionally through end of support.
And then at end of support, we expect most of the remaining server seats that migrate will migrate to data center, and we've also built appropriately prudent assumptions for customers who will choose not to migrate in FY ‘24 into our guidance, and we'll be able to share more on quarter-to-quarter assumptions related to that server end of support dynamics when we provide our Q2 guidance next quarter. Cam?
Yes. Just adding to that, I just want to highlight that this entire transition since we announced the end of server support almost three years ago, has been a multi-year journey and a multi-year investment across all factions in Atlassian, whether it's go to market, getting closer to our customers, whether it’s R&D teams, eliminating cloud blockers, delivering scale certifications, you name it. And of course, the variety of programs we've rolled out from price changes to loyalty discounts. And of course, this large compelling event with the end of server support coming up in February. So it’s been a multiyear journey, and as we've been saying, we're very been very consistent and very happy with our performance along the way. We've been able to retain a very large portion of our server customers, while getting our customers to choose cloud or data center appropriately, that's it.
We have about six months more as we come up to February. We have a significant server customer base still out there, they are of all shapes and sizes, I have to say, but they're the ones who waited the last to the latest to make this choice, which is perfectly fine. The good part there is we are in a better position than we've ever been to help those customers make the right choice for their company and transition as quickly as possible. Obviously, we'll incentivize our customers to choose cloud first and foremost in all of those conversations, but data center of course is there. And honestly, a great option for some customers out there who simply are still not ready to move to cloud.
As far as who will choose what, as Joe said, we largely see that customer choice falling in line with what we kind of seen over the last year. And of course, the customer's awake for the last minute, definitely will have data center as a easy migration path for them if they want to stay on prem.
Your next question comes from Ryan MacWilliams from Barclays. Please go ahead.
Thanks for taking the question. A two-part question here on 4Q cloud results. Could you maybe provide some context around what the contribution was from migration to cloud growth in the quarter? And how should we also think about the contribution from the expiration of the loyalty discount program to that fourth quarter cloud growth? Thanks.
Yes, thanks for the question. The first part of the question in terms of migrations, the migrations contribution to growth in the quarter was very consistent with what it's been in the past. I think we've talked about it being approximately 10 points in FY ’23, that was a similar outcome in Q4. In terms of outperformance to the revenue guide, the outperformance was driven by stronger-than-expected purchasing in June and primarily in enterprise ahead of the expiration of our loyalty discount program and that came in the form of both more deals and higher contract value per deal and it drove strong results in migration, seed expansion and upsell to premium and enterprise versions of our products across both our cloud and data center businesses and better over the outperformance there.
The server outperformance in the quarter was driven strictly by stronger-than-expected renewals and larger deal sizes. And then finally marketplace outperformance is driven by app pull through on the stronger cloud and data center sales I noted earlier. Hope that helps.
Yes.
And this is Cameron. Just from a customer perspective, I just want to say that none of this was really a surprise for the customers. Now we've been very open along the way, for over the last few years about how the loyalty discount program would be staging down over three years and going away entirely on July 1st. And it's that openness that these customers, largely, we've been working with them for many months sometimes with these bigger customers for years, knowing that this date was out there and gave them a large compelling event to make that choice.
Of course, as I already mentioned, we still yet have another big date out there with next February, and we'll continue to work with our customers, who still remain on server between now that.
Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.
Hi, thank you very much. I was curious if you could just comment on the transition that we’ve had, a transition of SAARs in the company and with the zero transition, how are you approaching the next year's planning? Are you looking for a new leader within the company hiring to the outside, what are the considerations on that transition? Thank you so much.
Hey, Kash, Scott here. I just want to say a huge thank you to Cameron for his 11-years at Atlassian. And, Cameron has done, you know, every job at Atlassian, he's done marketing presales and now eventually, you know, which is after running all of our, you know, sales and marketing, and he's done an incredible job. And, when we chatted about this, it's been, you know, the right time for the Cameron to get back, because the cloud migrations and end of life of server are just are going so well. So, it turned out that's, you know, the right time for Cameron to spent a bit of time skiing given he was up in Tahoe at the moment.
In terms of what happens going forward, Cameron has some really strong a leaders under him, inside the business, particularly on the sales side. I just got a leader that runs most of the sales organization at the moment. And so we expect there to be a strong continuity, of that leadership. At this stage, we're, not saying exactly how that role will be replaced or refilled, but, I don't expect there to be significant changes from what we've done in the past.
Your next question comes from Gregg Moskowitz from Mizuho Securities. Please go ahead.
Okay. Thank you for taking the question and best wishes to Cameron. For micro Scott, you were very clear at the Atlassian summit in April that Atlassian Intelligence would be embedded in all of your cloud additions and be free of charge. But since that time, we've seen several software companies, GitLab to name one of them, announced specific pricing for their Gen AI tech. And so I'm curious to hear your thoughts on the direct monetization plans that are developing in the industry. Also, if Atlassian Intelligence delivers the value to customers that you think it can, could all of this potentially make you rethink your approach at some point?
Yes. Hi, Greg. It's Mike here. Thanks for the question. Look, I would start with our philosophy here and long-term thinking as a company. We clearly believe that, Atlassian Intelligence and AI and new models are a huge opportunity for us. we think that software is supply constrained, not demand constrained. That will enable the creation of far more software. We are a content text based business and anything that allows you to manipulate, generate, pause, understand, text is very good for us as a company that targets collaboration and knowledge workers. We have a huge amount of data across our set of products and connections to third-party products and the best of big products in the world. That is incredibly valuable for us. So we are huge believers in AI and the potential of Atlassian Intelligence to drive significant value change for our customers.
Secondly, our philosophy is to live with R&D, to build and then customer value before thinking about monetization. I know there may be others in the industry if you go the other way around and announce a price then build something then work out of customer's care. We don't work that way, we go in the other direction. So, you've seen us execute that plan and that play many times over two decades and that's exactly what we're doing in terms of Atlassian Intelligence. We are super excited, and I believe you're at TEAM 2023, one of the best feature set, customer resonances we've had at the announcement and the launch of what we demonstrated to customers, huge customer excitement. Our job now is to turn that into actual customer usage in a huge manner first, and that is exactly what we're doing. Those features are now in the hands of the order of 1,000s of customers. and we are working every single day to make sure that those features deliver customer value and actually used, first.
We do believe they'll drive significant product competitiveness, and unleash your potential of every team, which is what we hear today. There are a number of ways we believe, as we've said before, that we, gain economically from the Atlassian Intelligence feature set. Again, first and foremost, we do believe it will continue to drive significant momentum and migrations of customers from server and data center products to the cloud. Atlassian Intelligence features only exist in the cloud and canon exist in the cloud. So anything that is a carrot to further improve that migration flow is a good thing for us economically as a business.
Secondly, we do believe it will drive product competitiveness and improve our new to new customer conversion rates and our win rates against competitors in all markets. Worth saying that we have built Atlassian Intelligence leveraging our cloud platform, which is both world-class and quite unique. This is a great example of why we spent five to 10 years building this cloud platform, because we can ship Atlassian intelligence features in every product in every category that we're in every market to improve our competitive standing across the board and we think that will come back in new customers and competitive wins over the medium to long-term.
And thirdly, some Atlassian intelligence features enhance and leverage features that are packaged into premium and enterprise additions. So we do believe it will drive some additional movement as customers go from free to standard, and standard to premium and premium to enterprise. Some features do exist in enterprise levels. For example, the Atlassian Analytics features that exist in the Enterprise edition, very powerful set of features to be able to use Atlassian Intelligence to generate queries for you is one of the resident features, but that will hopefully drive more enterprise addition upgrade.
So we do believe there's monetization opportunities for us in Atlassian Intelligence in summary. But philosophically, we're starting with R&D and building a deep set of core capabilities. We believe we can scale for the next five to 10 years as this wave takes over all software. And secondly, we're focusing on delivering customer value first. We are doing that every single day. We remain incredibly bullish about this area of the company.
Your next question comes from Brent Thill from Jefferies. Please go ahead.
Thanks. Joe, on the operating margin, you're guiding down 200 basis points year-over-year. And then I think in the shareholder letter, you expect that trend to reverse. Can you just walk through the next couple of year cadence and how you're thinking about the investments you're going after and then maybe tie that into that expansion and how you're thinking about how that plays out? Thanks.
It's Scott here. I'll take the first part about that, and Joe can get in with the details. And just to remind us of those who might be new to Atlassian story. Well, I think we've run a very successful and highly profitable business over a really long period of time. It's kicked off great. Free cash flow has great margins. And about 18 months ago, we identified a set of opportunities where we wanted to invest heavy arm behind those opportunities than we have historically.
And the three opportunities we articulated to you, our investors at our Investor Day were investing heavier in enterprise cloud investing heavier in our cloud migrations and investing more in our ITSM set of products. And on all three, I mean, super happy with the returns we've been getting migrations, we're continuing at the pace that we thought. We were ITSM, and particularly in this time of consolidation and people looking to get off high-priced legacy vendors. We've seen a lot of competitive switch outs. And in enterprise cloud, you've seen some of the number is now $0.5 million or $1 million deals in our shareholder letter, like we're seeing a great uptick in our enterprise segment as well. So all three of those are going really well.
Now you as investors have rightly asked, well, what does the shape of that investment look like? How many years are we doing that for? And in our investor letter this year, just that we just came out today, we shared that we expect the FY ‘24 margin profile to be the sort of lowest point in our margin, and we expect them to climb over the coming years back towards our historical norms.
Joe, do you want to add any more color to that?
Yes. Thanks, Scott. Brent, I was just going to walk you through some of the mechanics. So in FY '24, we do expect operating margins of approximately 18.5%, as Scott mentioned. That's lower than this year, and it's driven by the strategic high-priority areas we're investing in that Scott and Mike have both highlighted including the areas of innovation like AI. Keep in mind in FY '24, we'll also be lapping the H2 benefit of restructuring savings and lower bonus expense that we had in FY '23.
In terms of FY '25, what's happening there is we do expect continued healthy revenue growth in FY '25 combined with our expectation of improving operating leverage as operating expense growth moderates, as Scott mentioned, particularly in the big areas of investment like cloud migrations and we will continue to drive general efficiency improvements with scale. So that's some of the mechanics underneath the philosophy that Scott articulated.
Your next question comes from Ari Terjanian from Cleveland Research. Please go ahead.
Congrats on the results, Cameron. I know you're moving at the end of the year, but congrats on a great run. I guess a question for you, a lot of strength here in the quarter on enterprise side. If you could double-click what do you think changed from a go-to-market perspective investments into Enterprise Advocates and the partner side that's helped drive some of these larger deals? And do you feel like Atlassian's at a steady state now in terms of the investments on the go-to-market side? Or is there more to come here as you think about the future? Thank you.
Thank you for the question. And yes, we're very happy with the results we had in Q4 and the strength we continue to see in migrations in enterprise. But like I said, none of this happened overnight, and none of this was specifically just because of the go-to-market teams focused more on enterprise. This really has been a multiyear investment from Atlassian, largely with the commitment to get closer to our largest customers, and deliver -- honestly, to become the strategic partners that they want us to be.
Now this starts with R&D, and you see us deliver massive investments in scale. We have 50,000 users in our cloud products today, certifications, extensibility and largely just understanding our enterprise customers' unique needs much more closely. And then, of course, we match that investment in go-to-market by including our enterprise advocates, our technical account managers, our customer success managers and so on. And as we got closer, we've been able to get larger deals, longer-term commitments and become the strategic partners that customers want.
However, we've been able to do this all through evolution, as we've said, not revolution, and you see that today in our sales and marketing spend. So we've been able to actually get close to our largest customers to do these larger enterprise transactions, all while maintaining largely industry-leading sales and marketing expense, something that I'm exceedingly proud of and something that I'm very happy with my team will continue to do going forward is have that great balance of understanding our flywheel and product-led growth and all those great principles that Mike largely laid out earlier of how we're even thinking about AI.
But then, of course, when we're ready, go to our largest customers, and bring those solutions to them and, of course, get value and return for that. So we will continue to get closer to our largest customers, but we will absolutely continue to maintain our incredible efficient go-to-market structure going forward.
Your next question comes from Michael Turits from KeyBanc Capital Markets. Please go ahead.
So you said in a couple of places that migrations were strong, but you talked about both in the data centers as well as to cloud. I was wondering if you could drill on specifically on the migrations to cloud. So you mentioned things like data residency that were obstacles that were being removed. But are we in a position where whether it's because macro feels better and people are okay on TCO or some other reason that the actual migrations from let's just call it on-prem, but as a server to cloud improving at this point? Is that sustainable?
This is Cameron here. So the migration plan, like it hasn't been a multiyear program we put in place. And as the customers choosing cloud, choosing data center has been very much in line with what we've expected. As we eliminate cloud blockers, whether that's data residency, scale, extensibility and to be very honest, we have a public road map where we show all of our customers, here's all the things that we are shipping down the road so that they can make the appropriate choices going forward.
It's a combination of all of those things that have allowed us to get these large customers choosing to move to cloud. Of course, as we've said, there are still plenty of customers out there that are ready for cloud would prefer to stay on premises and are choosing data center, and we will continue to see, I think, a large portion of customers going over the next year, choosing data center as that option.
But that's not a dead end. We largely see that investment in data center as a further commitment into Atlassian. And we've proven again and again that we can move data center customers to the cloud with half of our migrated seats coming from data center customers. So it's once again, we provide the optionality for the customers throughout if they choose data center, that's great. We'll continue to work with them, moving them to cloud and getting the most value from Atlassian long term.
Mike, you got anything to add?
Nothing, Cameron. I think you now that just reemphasizing that the half migrated seats coming from data center is a really important milestone for us as we continue this long-term journey.
Your next question comes from Alex Zukin from Wolf Research. Please go ahead.
Hey, guys. Thanks for taking the question. Maybe just first, if we look at the cloud revenue growth number, and we look at -- we try to decompose net new ARR into net new versus migration versus expansion. You've talked a little bit about the migration dynamic. But how much -- like if we look at the -- if we just ask you like a cloud NRR metric and how much is coming from expansion. It would be great to understand that, particularly as we're getting into the later innings of the migration?
And then maybe just as a follow-up, to, you talked about healthy top line growth for fiscal '25. You gave the 25% to 30% growth range for '24, which we really appreciate, by the way. Is that a durable kind of growth rate? It's obviously a wider range given the macro uncertainty. But is that growth rate likely to stay durable particularly as maybe the migration tailwinds start to ebb a little bit as we get past the server end of life?
Yes. Thanks for the question, Alex. I'd say, starting with your last question. In terms of FY '25, we're obviously not giving any guidance on that. To your broader question, I do believe it's durable. The value that we're adding to the products that cloud brings that's very specific, the value it delivers to customers, I think there's a lot of opportunity for tailwind in that business. And so directionally speaking, we should continue to see very healthy growth, as I mentioned, for FY '25. That will be driven primarily by cloud as the server revenue base goes away and increasingly, data center customers migrate to the cloud.
In terms of your first question on net retention rates, I would just say paid seat expansion and free-to-paid conversions continue to be impacted by the macroeconomic headwinds that we've seen. That would impact that area of the business. In terms of a specific expansion rate, as you know, we don’t quarterly retention and expansion rates. Having said that we talked about the macroeconomic pressures. And the underlying fundamentals in our business outside of that remain very strong, however, and we see no change to our structural competitive position. So we do expect those retention rates to improve once the macro picture stabilizes and begins to improve.
And then as you talked about earlier, I'd also highlight other aspects of key aspects of our business like migrations and cross sell and up sell and monthly active usage. Those all remain very healthy and speak to the highly valuable and mission critical nature of our product and those will also feed future expansion rate improvements. So our outlook is very positive on that going forward.
Your next question comes from Fred Havemeyer from Macquarie. Please go ahead.
Hi, thank you very much the question. Firstly, actually another thank you for introducing a dark theme as well to Jira. I think for people like me greatly appreciate it, especially when I'm on with some of my colleagues in Australia late at night. The question right now is really focusing on the migration tooling that you have. As you're looking at and kind of reviewing the learnings that you have and the investments you've made into your migration tooling?
Just how confident are you that at this point, you have the server to either data center or cloud migration tooling on-ramp capabilities really solved versus are there any significant risks you still see for some of those larger enterprise customers out server end of life to need to wait a little longer to have either like additional tools built out?
Hey, Fred, I can take that. It's Mike, and thanks for the kudos on dark team and Jira. It's a good example of the amazing R&D team we have. It's done properly with design tokens and all sorts of things across our cloud platform using Atlas Kit. So it will be coming to other products shortly. It's already in hand for products that you see well across the area with a huge focus on accessibility, which has kept us into migrations. Dark team is quite challenging to do in an accessible way that works to meet all of the standards required for people who have accessibility issues when it comes to software.
Gets to some of the migration tooling questions that you've asked. Our migration tooling continues to improve quarter-on-quarter. We work really hard on the tools to make that as self-service as possible. And largely what we are doing is continue to work on the scale and speed of the tools to move huge amounts of data faster and faster the repeatability of those tools. Customers don't do one-shot migrations, especially the larger ones. They will migrate their data across, test it, migrate it again and do that multiple times. So the tooling becomes incredibly important to be repeatable and reliable.
And lastly, we work with customers who have lots of edge cases, some of them have 10 to 20 years of Jira family or Confluence data on-prem. They may have added their own database, they may have done a whole lot of things that we have to take these edge cases to move them across. We continue to work on how to do that as we get bigger and bigger customers, and we can counter more and more edge cases, more of the tooling is self-service and repeatable.
And lastly, we are continuing to work with app vendors and our amazing marketplace community to make sure that their app data and the apps themselves can be migrated as they move from our on-premise extensibility and plug-in systems to connect and forge in the cloud. That's quite a unique migration challenge. I would say every quarter, we get better and better at doing this. We can use less human power to do migrations. We can do bigger migrations. And I'm really proud of how the team is going on managing all of that tooling.
So continuing to improve I don't know it's -- your question was around, is it solved, it will get better every single quarter as it has done for the last three years, and we'll continue to do that as we migrate more and more server and data center customers at the time.
Your next question comes from Peter Weed from AllianceBernstein. Please go ahead.
Thank you. And great to see IT service management growth called out on the note. It was top of mind for us, too. We see it as a really large opportunity for you going forward. And obviously, it already is a large business. really impressive to see the 45,000 customers and 80% year-over-year growth. Kind of looking forward, how should we think about the total upside from here? Like what are the profile of the companies that on the largest opportunity going forward that will drive more growth? And how much additional headroom do you see in this over the coming kind of 3-ish years?
Thanks, Peter, It's Scott here. Look, I think we have a huge opportunity for durable growth over such along a period of time. We operate in very large markets and take them one by one. You talked about Jira Service Management and ITSM. The opportunity there is we're the challenger in that particular market. And there's plenty of large incumbents there and putting it on happy customers in those large incumbents. And so there's just massive opportunities for us to take market share in that particular space.
In our migrations, we say, let me talk about wealth management for all. So there's just a huge opportunity there. That's a very large market. And if you look at the stronghold we have around developers and around development teams. And when I talk to CEOs these days around the world, like the biggest -- one of the biggest thing issues is how do they make the development teams productive, how do they get more out of the development teams. And when we look at customers consolidating around work management for all items, they can throw out other vendors, but they can't get rid of the tools, the power of their engineering teams. And so we have a huge opportunity for consolidation in our work management for all markets.
And then if I look at the innovations that we're bringing to our traditional Agile and DevOps market, we're a large player there, but there's just so many different customer problems that we can be solving for them. And you saw us launch Jira Product Discovery to target product managers. So if we start tackling more and more personas across there, there's just so much customer value that we can produce. And so I see huge opportunities in every market that we have at the moment. And so I don't really see any limit there. Migration of our customers from to cloud is just a stepping stone for us to be able to keep delivering huge value and increased cloud revenue.
And, it’s Cameron. I'll follow-up just speaking with customers as well. The IT service fans, as we mentioned, 80% growth in our largest enterprise customers with Jira Service Management last year, which shows that, hey, we struck a vein here with the customers where if you look at the trends in the market, customers are trying to consolidate vendors and save money, Jira Service Management for existing Atlassian customers is a great opportunity. Customers also want their development teams and IT teams to come closer together to work on a common platform.
Jira Service Management provides that absolute capability and customers want more flexibility, quicker time to value of their investments. They don't want to spend six to 12 months rolling out these tools. They want to be able to purchase software, get it running and start delivering valor to their end users in days, weeks at most and Jira Service Management once again delivers value here. So in the IT Service Management market broadly, I think we have a very unique offering with a very unique value prop at a very unique price point. And all 3 of those reasons are the reasons why customers continue to look to us and invest in Jira Service Management.
Your next question comes from Derrick Wood from TD Cowen. Please go ahead.
Oh, great. Thanks. I guess, Joe, this is for you. I wanted to ask about like some of the expansion headwinds being felt upmarket. I think with your smaller customers, I know a lot are on monthly contracts. So perhaps net expansion rates normalize quicker. But within your enterprise customers, you often have multiyear contracts. Customers would historically buy seats for growth to take advantage of pricing and we've heard from other seat-based models that as growth in the tech world has slowed, expansions on renewals can be a lot more challenging. So just curious, is that something you're seeing and do you think we still need some time quarters ahead to fully cycle through this with kind of longer enterprise contracts?
Yes. Thanks for the question. Let me just talk a little bit about the differences between SMB and Enterprise, and I think it will get to your question. The SMB segment of our business is the most sensitive to macro and it has been the most impacted over the last year by the macroeconomic headwinds. We also do see the impact of changes in SMB in our cloud revenue sooner than in enterprise, simply given the mix of monthly cloud billings that we have in SMB. So I do expect SMB to be an area that will most benefit in our portfolio if macro improves, and we'll see that impact in a fairly timely way in our revenue and P&L when it occurs.
Now as you point out, Enterprise has slightly different dynamics. It's been less macro sensitive over the last year, still impacted by macro, but not to the same degree as SMB and as you pointed out, Enterprise also benefits from the investments we've made to unblock cloud migrations and improve enterprise capabilities, including premium enterprise SKU value. And they purchased that value through a higher percentage of annual and multiyear contract billings and that reduces the quarter-to-quarter revenue variability to some degree. So you will see that play out over time, and it does take longer for us to see that goodness from enterprise fully reflected in the P&L as a result of that.
Your next question comes from Austin Cole from Citizen JMP Securities. Please go ahead.
Yes, thanks for taking my question. Congrats on the results. So just cash now exceeds $2 billion on the balance sheet kind of a milestone there. I was wondering if you guys could share anything on how you guys are thinking about M&A strategy at this stage?
Yes. Thanks for the question. I'll talk a little bit just in general about our capital allocation philosophy, which really hasn't changed. The first priority is investment to drive the long-term growth of our business, both from an organic R&D and sales and marketing perspective as well as you point out, mergers and acquisitions and strategic investments. And from there, we typically look to opportunistically return capital to shareholders as we're currently doing through the share repurchase plan. So Atlassian has always done M&A as part of its growth strategy, and that continues to be part of it going forward as well. Scott?
I don't think there's any change to our philosophy, irrespective of what our balance sheet numbers look like. We've always been a company that thinks about the long-term in terms of our investments. And it's not going to change as a result of having a large or a small cash balance out there. We look at the right things suites like from a new customer acquisition perspective. We don't want to dig up a hole to the suit. We're willing to sit around and wait for something that really hits us and really provides value to our customers. And so for us, we're always on the lookout for great value assets, and we'll do them when the time is right, not irrespective of our bank balance.
Your next question comes from Fred Havemeyer from Macquarie. Please go ahead.
Hi, I’m back. Thank you. I wanted to also ask on the ITSM side of the business as well in Jira Service Management. Just the enterprise growth, in particular, I think you noted about 80% year-over-year is looking quite impressive. Just was hoping to better understand, to the extent you can describe kind of how much of those Jira Service Management customers you would qualify as enterprise at this point in time? And then secondly, what's really started to work there to be able to turn on that enterprise growth within Service Management?
Cameron here. I'll call out what's driving the enterprise success in IT service management largely comes off the back of many of our enterprise investments broadly at the Atlassian cloud platform level, whether that was data residency, whether that’s certifications, all the same benefits that we had for driving migrations in large enterprise automatically get translated to Jira Service Management.
However, the Jira Service Management team has also been exceedingly focused on knocking down the specific IT requirements of those larger customers. And you see that largely show up the validation of that as we are in the leadership quadrant in the Gartner IT Magic Quadrant, which basically shows that, hey, yes, we check all the boxes that those customers require while maintaining that unique value of bringing dev and IT closer together at a at a relatively competitive price point.
So it's really the investment across the board in IT service management. As we said a few years ago now, we're going to double down this area. And as we paid off those R&D investments, and focused our go-to-market efforts as we reach out to our larger customers, and we're talking to them about migrating the cloud. We're not just talking about getting what they already have over to the cloud. We talked about expanding the overall Atlassian value prop as they move to the Atlassian cloud platform, and that's also helped us expand the Jira Service Management offerings. Mike?
Yes. I just wanted to add on one thing. I was talking to an enterprise customer maybe a month, 1.5 months ago. And one of the things that was coming through to them was the value of the Atlassian platform. And one of the reasons why they opted for JSM. In particular, in this case, they used Atlassian in their Agile and DevOps, the Jira software and other products. The combination of development teams and IT teams is increasingly important. We have an incredibly unique value advantage there as every customer every company becomes a software company, that connectivity between development teams and IT teams is incredibly important.
That's powered by our investments in the Atlassian platform over time. You're seeing that come through in Atlassian Intelligence and a whole host of other ways. But it's really gratifying to us to see that resonating with customers, especially the large customers, and it's a big differentiator. The same actually applies on the connectivity between IT and service teams in an organization and the work management space.
So on the other side of our market combinations, as enterprise service management continues to roll out, our virtual agent technologies using Atlassian Intelligence, I think will be a huge boon to larger enterprises in trying to take service management more broadly from IT into HR, finance, marketing and other capabilities. This all relies on the power of the Atlassian cloud platform. It will continue to drive migrations of our largest customers there and I think be a differentiator in the ITSM space.
Thank you. That's all the questions we have time for today. I will now turn the call over to Scott for closing remarks.
So thank you to everyone for joining our call today. As always, we appreciate your thoughtful questions and continued support and a special thank you to the Atlassian team for your resilience and closing the year out with strong momentum. Also want to say a special thank you for Cameron, that was his last earnings call, I just want to say a huge thank you for the revenues you've given to Atlassian so far. Thank you all, and I'll see you next quarter.