Joe Binz: Yes. Thanks, Alex. A lot of questions there, so if I don’t hit them all — bring me back. So I’ll start with migrations. We do continue to expect migrations to be a key driver of cloud revenue growth in Q4 and FY ’25. Despite a few if any server migrations post into support, this is due to the significant size of the data center installed base and the opportunity we have to enable those customers — some of our very largest customers to move to the cloud. And that opportunity today is even bigger than we expected it to be three months ago, given the strong customer retention and migrations from server to data center this quarter. Having said that, we also expect the migration benefit to cloud revenue growth to gradually decline over time from the approximately 10 point benefit in FY ’24, given the lack of server migrations.
Now to drive these migrations, I talked earlier about the things we’re doing. So we have a lot of confidence in our ability to execute on that and to drive it. So that’s how we think about the growth impact to cloud from migrations going forward. In terms of the deal structure, if you look at our overall deal volume this quarter, even though we had a large number of absolute deals, the mix between annual and multi-year were very consistent and similar to past quarters. So think of the overall volume growing and within that volume, the mix between multi-year and annual being the same.
Mike Cannon-Brookes: I just add a few small points to that, Alex. Firstly, in terms of deals like you’re seeing a lot more hybrid deals, obviously from the data center type customer. One of the points that we like to make clear is the larger and more complex customers moving to the cloud is not a sort of a 1-day single button click event like changing an app on your phone, right? They have complex deployments with lots of integrations and they’re enmeshed into deep customer workflows. This is fantastic for Atlassian. This shows how much value we have in our products. It means the migration journey is more of a gradual over time series of events. And that shows up in their hybrid both in terms of their deployment environment, topology and their deal construct.
I will say, we continue to be agile with our resources at Atlassian, we pride ourselves in our ability to move R&D around to where we need it to be. Obviously, with the end of server, we can move slightly more R&D towards the cloud. But we maintain a strong commitment to the data center business and continuing to move that forward. And there is still lots of work to do, right? We are incredibly proud of the work we’ve done in performance and scale, in governance and data residency. We rolled out seven new regions this quarter and an extensibility and all the things that our largest customers need, and you’ll see us continuing to invest in those over the coming year as part of the journey.
Alex Zukin: Perfect. Thank you guys.
Scott Farquhar: Thanks Alex.
Operator: Your next question, Keith Bachman from BMO Capital Markets. Please go ahead.
Keith Bachman: Yes. Many thanks for taking the call. Joe, I think this is for you as well, but I wanted to talk about data center growth. So the guidance that you’ve given for Q4 of — call it, 40 to 42 with 15 points of help, even net of help, it would have – [kindly] (ph) stronger than I would have anticipated. And so if we look out over the horizon, is there any puts and takes that you can give us on how to construct or think about data center growth specifically. And just to even take a step back. As we look at Analyst Day next week, or the analyst event, I should say, your event that’s very much looking forward to. Will management provide some longer-term model frameworks, either the top line or margin construct? Thanks very much.
Joe Binz: Yes. Great question, Keith. Thanks. Let me start with the data center question and frame it in terms of long-term growth drivers on that model. We expect data center growth rates will decelerate through FY ’25, just given the migration dynamics into and out of data center and the challenging comparables are going to have to FY ’24 to the question earlier. We are not going to have another server and to support moment in FY ’25. Having said that, in FY ’24 data center revenue growth benefited from migration flows from server net the headwind from data center migration to cloud. And with server and to support, we do expect that benefit to wane over the course of the next year to 18 months, given limited if any new migrations from unsupported server customers and accelerating data center migrations from cloud.
We should see a much more pronounced decrease in that benefit in H2 FY ’25 and into FY ’26 as we lap the strong migrations from server in this quarter, at which point we’ll likely have a net headwind to data center revenue growth driven by migration to the cloud. So that’s sort of the migration stories I think it’s also important to keep in mind as you think about long-term data center growth rates, our customer base here is predominantly enterprise with very high renewal rates and price increases and expansion are the other key drivers beyond those migration dynamics. And we do expect those to remain healthy contributors to growth going forward. In terms of Analyst Day, I appreciate the interest in that — really looking forward to seeing you and many of your colleagues next week.
I’m not going to share a whole lot today other than to say we plan to share our optimism around the long-term opportunities we have, how we think about the drivers of durable growth and the key areas of investment we’ll be making that will enable us to deliver on that. And I’ll share the rest next week when we get together.
Keith Bachman: All right. Many thanks, look forward to it.
Operator: The next question comes from Brent Thill from Jefferies. Please go ahead Brent.
Brent Thill: Thanks. Joe, I think many on the buy side are still hung up on why cloud is growing faster right now. And I know you are expecting to accelerate going forward. But what is I mean — when you think about the differential of kind of the expectation versus what you are seeing, what has been holding cloud back as much? Is it just D.C. was easier to make the migration? Is there something else that’s going on? Because I think most felt like this would actually move a little faster, and we know it’s going to accelerate going forward for your guide. But just curious to get your thoughts on what you think is maybe can restrain some of the growth or maybe our expectations are just too big.
Joe Binz: Yes. With respect to the server and to support Brent you’ll recall that we did talk about the fact that of the server customers that were there at end of support, we expected the vast majority, if not all of those customers to migrate to data center, right, because those are large customers with very complex environments. And it is a much easier migration path to data center than cloud. And most of those customers need a little more time. So I would say migrations as part of the model has performed in line or better than what we expected all year, and it’s held up really well. Stepping back at the overall cloud business. I think the main pain point has been around paid seat expansion and weakness. Everything else in the model has performed in-line with what we expected entering the year, and continues to hold up really well in what has been a really mixed, if not difficult macroeconomic environment.
In terms of paid seat expansion, our rate of paid seat expansion in the quarter overall remained below prior year levels, as I mentioned earlier. But I talked about the fact that trend quarter-to-quarter is improving and beginning to moderate from prior quarters. Within that trend, seat expansion rates in SMB, continue to be particularly challenged. And so that’s been, if you want to center the pain point there and the expectation delta that could be an aspect of it. Our enterprise rates remain very stable. And so we continue to believe a big driver of this trend is macro as customers tightly managed headcount growth and costs and where we see SMB more impacted, broadly speaking than enterprise. So from our perspective that’s been the primary pain point and the headwind on the business from a cloud perspective.
The remaining drivers, whether it’s migration or cross-sell or up-sell to premium additions even new customers are coming back in-line. All of those aspects continue to perform well and in-line with our expectations. So that’s — from our perspective, that’s been the biggest expectation Delta.
Brent Thill: Great. Thank you.
Operator: Your next our next question comes from Nick Altmann from Scotiabank. Please go ahead.
Nick Altmann: Awesome. Thanks guys. Wanted to build on the last question a little bit. But just in your prepared remarks, you guys talked about how the opportunity around cloud today is much larger versus your initial expectations. And I was just wondering if you guys could impact that a bit. I mean you guys talked about seat counts on cloud or higher churn sort of was above expectations. But maybe just talk about why you see the opportunity more significant today than you did several years ago? What’s sort of driving that heightened optimism? And just any other color you can provide around what you guys are seeing with your current cloud customers that’s driving the upside versus sort of your initial expectations. Thanks.
Scott Farquhar: Thanks, Nick. Its Scott here. A couple of reasons. One is — let’s just take the migration asset first, which is that in our migration models, everything has performed as expected. In terms of how many people we expect to migrate from server to cloud. What these companies allow people to trend out. And I think, as pointed to the stickiness of our overall offering to our customers. These are the times when you would expect competitors or alternatives to be researched out there in the market. And we haven’t seen that. We’ve seen people really stick with and double down on investment in Atlassian’s products. And so — they may not have made the first step to cloud. They’ve made the first step by data center. But I can tell you with every one of those customers I speak to large or small, cloud is in their future.
And it’s really, okay — they’re either a feature from us or they want a particular data residency or a particular compliance that we’re already working on. Or they just got a project internally that they are trying to schedule when they want to get the migration done. And so I have a huge kind of excitement around what that [ulcer] (ph) is killing our migrations. If we take then the just the market size and opportunity, we can share some — next week around that. But I’m super excited by what that shows, bottoms up of just the opportunity inside our customer base. And that is getting larger for a couple of reasons. One is that we’ve got new products that are coming to market, our point products are gaining real customer usage and sort of early in the revenue on the usage that they’re growing pretty fast.
And we know that those new products can then be sold across our entire customer base. Two is a consolidation motion, we are seeing across the industry. And in times like this, our customers are looking to deal with less vendors, and they are looking for a single system of work across their entire organization to make sure that work can move across every department. And so we are seeing competitive switch outs of us — to consolidate on Atlassian, and so that is really exciting. And lastly, with AI and what we can do there — there’s a couple of things. One is, I firmly believe that more software is going to get built on the far side of this. And so the market for people who want to use our tools and products and so forth to broadly help build software is going to increase.
