(TEAM)
Q2 2023 Earnings-Transcript
Martin Lam - Head of Investor Relations
Mike Cannon-Brookes - Co-Founder and Chief Executive Officer
Cameron Deatsch - Chief Revenue Officer
Joe Binz - Chief Financial Officer
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Gregg Moskowitz - Mizuho Securities - Analyst
Keith Weiss - Morgan Stanley - Analyst
Fred Havemeyer - Macquarie - Analyst
Michael Turrin - Wells Fargo Securities - Analyst
Kasthuri Rangan - Goldman Sachs - Analyst
Luv Sodha - Jefferies - Analyst
Alex Zukin - Wolfe Research - Analyst
Michael Turits - KeyBanc - Analyst
Arjun Bhatia - William Blair - Analyst
Ryan McWilliams - Barclays - Analyst
Ittai Kidron - Oppenheimer - Analyst
Fatima Boolani - Citi - Analyst
Peter Wade - Bernstein - Analyst
Ari Terjanian - Cleveland Research - Analyst
Operator
Good afternoon, and thank you for joining Atlassian's Earnings Conference Call for the Second 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.
Martin Lam - Head of Investor Relations
Welcome to Atlassian's Second Quarter 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 second-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 related materials, including the earnings press release and supplemental investor data sheet. As always, our shareholder letter contains managements insight 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 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 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 quarter - and quarterly reports.
During today's call, 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, we'd like to allow as many of you to participate in Q&A as possible. To facilitate that, we'll take one question at a time. Please rejoin the queue if you have another question or a follow-up, and we'll do our best to come back to you later in the session. With that, I'll turn the call over to Mike for opening remarks.
Mike Cannon-Brookes - Co-Founder and Chief Executive Officer
Thank you all for joining us today. As you've already read in our shareholder letter, we closed out 2022 proud of everything we've accomplished in yet another unpredictable year. Despite the current macroeconomic environment, the massive opportunities in front of us have not changed. We continue to make great strides towards our long-term goals and we're ready to execute with relentless focus in 2023. We've achieved a ton this quarter. Shipping many platform enhancements and product features that deliver incredible value to delight our customers in the cloud. Including delivering data residency in Germany, launching automation and Confluence, helping our customers to the cloud with migrations up nearly 2x from the prior year, and completing several of our largest migrations to-date, and showcasing our unique position in the ITSM market with impressive customer growth, multiple large swap out stories and recognition as a leader by industry analysts. And maybe just a handful of examples. We've always prioritize putting our customers first and we're seeing customers increasingly turn to Atlassian as a trusted vendor asking how to operate their businesses better. 2023 will be all about helping our customers navigate these challenging times, absorbing the downstream impacts on our business and setting ourselves up for continued long-term success. With that, I look-forward to your questions and I'll pass the call to the operator for Q&A.
Operator
We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Gregg Moskowitz from Mizuho Securities, please go ahead.
Gregg Moskowitz - Mizuho Securities - Analyst
Okay, thank you very much and good afternoon, everyone. So it sounds like the macro has had no impact on migration activity so far, even though really, you're seeing it in some other areas - you're still expecting migrations to add 10 points of cloud revenue growth this year. But in an environment where customers are clearly tightening their belt, why is it that you think migrations will continue unabated? Is the TCO advantage strong enough to compel customers even though they have to make a financial commitment? Is the end of support date having a real impact there as well? Any color would be helpful. Thank you.
Cameron Deatsch - Chief Revenue Officer
Hey, Gregg, this is Cameron. I'll start off with some details, and then I'll probably let Mike add some more from what he's seeing. So as you already know, more than two years ago, we announced the upcoming end of life of our server products. And ever since then, we've been on this migration journey, helping our on-premises customers move from both server and data center to our cloud offerings. And I have to say that even in the uncertain macroeconomic times, every day that goes by, I am more confident in our ability to not only attract our customers to the cloud, but convince them of the additional ROI savings that are going to our cloud, the additional benefits from a feature perspective, from there we have been able to get - increasing our ability to get through the contractual, legal and data privacy aspects of moving our customers to the cloud. We made huge strides in actually migrating their data and their users to the cloud, and then from there actually onboarding their users so they understand the new experience. This obviously can be an extremely complex exercise. But once again, we're two years into this, and every single day goes by, we've been getting better. I also want to recognize that we purposely built and engineered kind of this path over this three-year time frame, using loyalty discounts, improvements in our products, so it would also provide compelling events along the way for our customers to move. And this just further establishes the demand for our migrations, and we continue to feel strong about that additional 10% growth that we see coming from migrations going forward. Mike, do you have anything to add?
Mike Cannon-Brookes - Co-Founder and Chief Executive Officer
Yeah, thanks, Gregg. Look, I just wanted to say, it's incredibly important in this environment to help our customers through as well. And you talked about the TCO of moving to the cloud. I do think in an environment where customers are looking to get efficiency to optimize their spend, there's increasing recognition that the cloud itself is a great ownership model for them. It's a cheaper way for them to run and own and operate their software. And secondly, the benefits of the platform that we've built and the integration across our products, especially as they're experimenting and trying new things, allows them to consume more of Atlassian's products and at the same time do so while making their businesses more efficient, which is what our job is to help them become more efficient businesses, especially in these difficult times. So I think we're really well positioned in that way.
Gregg Moskowitz - Mizuho Securities - Analyst
All right, very helpful, thank you, guys.
Operator
Your next question comes from Keith Weiss from Morgan Stanley. Please go ahead.
Keith Weiss - Morgan Stanley - Analyst
Thank you guys for taking the question. In the shareholder letter, you talked about more focused investments on a go-forward basis and the operating margin target for the full year comes up by a little bit. But it doesn't really seem - it seems like most of that came from sort of a better margin performance in the current quarter versus really changing sort of the investment profile for the second half. So you could talk to us a little bit about kind of where you're moderating investment? Is there a potential offset? And maybe to be really to the point, why not sort of more moderation considering the environment and work to drive the margin perhaps back to where we saw them historically in the low 20s?
Joe Binz - Chief Financial Officer
Well, I'll start. Yes, Keith, this is Joe. I'll start, and then I'll pass it off to Scott for additional thoughts. You're right. Our overall view of H2 margin has not fundamentally changed from the prior quarter. We expect revenue growth to moderate in H2 driven by macro impacts we saw in Q2. And then in addition, we had some timing impact on the pull forward of opex savings into Q2 that won't repeat in H2, and we'll continue to invest and hire against the terrific long-term opportunities we see. So those are the primary factors. You asked about the broader work that we're doing around reprioritization. What I would say there, the work happening there comes in a lot of different flavors and takes a lot of different shapes. Sometimes it's about stopping something. It could be about sequencing of the events, moving something to a more milestone-based funding model, structurally lowering the investment level based on a strategy adjustment. So as I think about the work we've been doing around focused reprioritization and resource allocation, it's really included some flavor of all these things to drive the right overall business outcome. And so we will continue to invest against the long-term opportunities while balancing that and being responsive to the macro environment and managing costs in conjunction with revenue growth. And I'll pass it over to Scott, if he'd like to add anything.
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
At the risk of repeating you, Joe, just a reminder for those that may be new to the Atlassian story. Back in April, we chatted with you, our investors at our Investor Day, and we talked about cluster of four growth opportunities that we saw ahead of us is those - were around cloud migrations, our ITSM opportunity to take market share there, better serving enterprise customers and launching and growing new product that we built on the back of prior investments we made in the Atlassian platform. And what we've seen though, is that those four areas are having great returns. We've got incredible momentum in those four areas. And we said about Atlassian in times of good and times of bad that we think about things for the long term and we want to invest over the long term and make the right choices as a business to get the right returns. And so we continue to invest in those four areas. We're bouncing from other areas of our portfolio into these great opportunities that we've identified and shared with you, of course, responsive to the current macro environment and our commitments on margin targets that we've given out to you.
Keith Weiss - Morgan Stanley - Analyst
That's helpful. Thank you, guys.
Operator
Your next question comes from Fred Havemeyer from Macquarie. Please go ahead.
Fred Havemeyer - Macquarie - Analyst
Thank you very much. I wanted to ask, in regards to just what you're talking about in terms of product innovation as you're investing during this period, certainly it's notable, the focus on ITSM. Could you take a moment perhaps and talk about how you think of product innovation development and just where Atlassian can innovate and drive another leg of growth as we just navigate and think about the other side of this macroeconomic environment?
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Yeah, hi, Fred, I can take that one. Look, it may sound like a boring answer to you. I think the way we think about product innovation in the current environment doesn't change to the way we thought about it a year ago, two years ago or three years ago, right? We have a job to unleash the potential of every team, and that's all about making our customers more efficient at running their businesses. Again, we - we can't help them make cars or rockets or drugs or provide financial services, whatever it is our customers are doing, but we can make their teams more efficient. And we really try to keep that as a North Star across all of our markets. At the same time, we continue to rebalance our priorities as we hear from customers and as we look at our resourcing. One of our advantages I would say, is having a large investment in R&D which is quite unique, is we're able to move those resources around a little bit more fluidly than other companies may be. So we continue to innovate. We have a lot of new products that we've built over the last couple of years, and we continue to work with customers in testing, things like [Indecipherable] discovery, Encompass and Atlas and a couple of upcoming ones like [Indecipherable] alpha and beta. Those are examples of ability to ship new things. At the same time, we continue to deepen our platform investment. And one of the things as I just mentioned to Gregg's question earlier, when customers move to the cloud, their ability to consume multiple Atlassian products via the platform and connect them together with things like smart links or analytics running across them is a huge advantage of the cloud. And that all comes from the innovation and investment in our infrastructure and ability to manage all of that sort of thing. At the same time, I doubt the innovation doesn't just come in new product form. So we continue to work on the big enterprise aspects of our cloud in terms of scale and performance, in terms of accessibility. As you said, this roll out new data residency regions this month, and we continue to work with our customers on what regions they want to see us data [Indecipherable], things like [Indecipherable] and HIPAA and all sorts of the acronym soup that comes with the enterprise. So those are all examples of where we spend our R&D dollars to continue to try to innovate on the things that customers want and are looking for. At the same time, we're obviously responsive to the environment that we exist in.
Operator
Your next question comes from Michael Turrin from Wells Fargo Security [Phonetic]. Please go ahead.
Michael Turrin - Wells Fargo Securities - Analyst
Hey there. Thanks. I appreciate you taking the question. On the cloud target, can you just expand on what goes into the new range and what makes that the right range going forward? There's some useful language in the letter, just around some assumptions that the macro worsened in the second half of the fiscal year. So maybe just what those impacts are? What gets worse? And the letter calls out December as especially pronounced. I'm just curious if there's anything you can say on whether those trends how consistent in January or if things are getting worse or better? Any color there as we're just kind of sorting through everything that's going on is helpful. Thank you.
Joe Binz - Chief Financial Officer
Yeah, thanks, Michael. This is Joe. We did take a fundamental change from our prior cloud guide in the prior quarter and that we have three months more of data points, including December, which you mentioned. And we have a much clearer picture of the trend line. And using that, our cloud guidance range assumes the macro environment gets worse in H2. And as a result, the trend lines from H1 continue into H2. You'll also notice we've maintained a five-point range on that guidance with the low end of that range not only assuming continued weakness in free-to-paid conversions and paid seat expansions that we've seen year-to-date, but also some macro impact areas that have held up really well, frankly, through the first half of FY '23 like churn, upsell and migration. So the rest of the picture is largely in line or better than three months ago. In terms of what we've seen in January, I'd say we've incorporated that into the guidance, and it's consistent with the assumptions that formulate the overall approach.
Michael Turrin - Wells Fargo Securities - Analyst
Thank you.
Operator
Your next question comes from Kash [Phonetic] Rangan from Goldman Sachs. Please go-ahead.
Kasthuri Rangan - Goldman Sachs - Analyst
Hi, thank you very much. So we've taken the right step in bringing down the cloud targets, I think it happened a couple of quarters consecutively. What gives you the confidence, therefore, how can we get the confidence that we're at the point where we can assess what are the leading indicators for your cloud business, kind of the rest of the business seems to be in pretty decent shape. Are you seeing any signs of stability at all? It does look like December ended on a slightly worse note than September did, and hence the forecast. But what are the leading indicators that you are looking at that we should be looking at for any signs of stabilization that could help us get comfort in the cloud forecast that have moved on? Thank you so much once again.
Cameron Deatsch - Chief Revenue Officer
This is Cameron, I'll take that one. So the two primary trends that we are seeing today that are headwinds are the free-to-paid conversions that we spoke about in Q1 continuing into Q2. We still see plenty of customers coming to our site, click in the try button and signing up for free versions of our products. They're just more - they're converting to paid customers. They're taking out their credit card at a slower rate than what we see in historic trends. And that's definitely continuing from Q1 to Q2. But obviously, we can see as forward-looking, we know how many people are signing up for our products. We know the activation rates of those customers. We know they're out there and actively using the free versions of our products. And we're just simply trying to get them to add their 11th and convert to a paid customer.
On the user expansion side, that's the other major headwind. This is basically people going from 20 users of Jira Software to 30 users of Jira Software. That too, is another headwind we are seeing. We're seeing that largely slowed down across Q1 and Q2 and became more pronounced in Q2 within our smaller customer base. Once again, we see that in activity rates. We see the people adding their users, and we see that in the overall monthly billing going forward. That said, as we look into this particular quarter compared from Q2 to Q3, we've seen largely the amount of customers that were downloading - or downgrading from the paid plans down to our free plan. That's why people going from 11users or 12 users to 10 users or 9 users, actually start to subside, and that's become - come back in January a little bit more positively. So we believe those are still the two headwinds that we're looking forward in the second half of the year, and we have plenty of telemetry across our customer segments, geographies, industries and so on to understand if any of those trends are changing going forward.
Kasthuri Rangan - Goldman Sachs - Analyst
Got it. I mean, how close are we to stability in those leading indicators you're looking at if you have a view. That's it for me. Thank you.
Joe Binz - Chief Financial Officer
Listen, there's plenty of variability in the business overall today. On the top of funnel, people coming to our site and converting, I feel they're very stable between Q1 and Q2. The end user growth is much harder to predict, and it might be hard to basically say whether that's going to be leveling out or that we'll see some change in the variability in the future.
Operator
Your next question comes from Brent Thill from Jefferies. Please go ahead.
Luv Sodha - Jefferies - Analyst
Hi, this is Luv Sodha on for Brent Thill. Thank you for taking my question. Just wanted to ask - thank you, Scott, for laying out those top four growth priorities going forward. I guess where does GeoWork management and Atlassian together rank in those priorities? And what traction have you seen with that product suite? Thank you.
Mike Cannon-Brookes - Co-Founder and Chief Executive Officer
I can take that one. Look, we maintain incredible bullishness on our position in the work management space. Trello continues to be a monster. Confluence continues to grow really, really strongly. You see that with all of the enterprise improvements in the cloud as well as automation and also to other things we shipped during the quarter. So we're very confident in the overall position we have in work management and especially with its connection to both the software and ITSM spaces as companies increasingly get more digital, it's a very unique position that we play. A part of that work management strategy, as you pointed out, is to have multiple leading vectors, in terms of Trello, Confluence and Jira work management, depending on the structure people are looking for and where they're coming from and what they already have. We see great traction for Jira Work Management in terms of usage and people who are heavily into the Jira role already. If you're into the Jira family, you have Jira Software, Jira Service Management. It's an entirely logical step for you to add Jira Work Management. And obviously, integrates with all the rest of our products very well, thanks to the the Jira platform and the Atlassian platform. It's very early days in that product's evolution quietly, so sort of a year and a bit in, and we continue to work with customers. It's increasingly gratifying to see forms of standardization where people are moving off other project management vendors and collaboration vendors to standardize on Jira and Confluence and the Atlassian suite. And that's why you see us investing in two things. One is the platform story, things like Smartlink that I've mentioned beforehand, analytics, automation, being able to automate across our product set is a big part of what customers are turning to Atlassian for. And secondly, you mentioned Atlassian Together. For those who are new, again, Atlassian Together is a packaging offering which allows our customers to choose to take Atlassian wall to wall for work management in exchange for getting a series of different products being Jira Wealth Management, Trello, Confluence and Atlassian Access, all in the one package. It's extremely early days for Atlassian Together, I would say. It is still in beta testing with our customers, but the reception so far has been really good, largely for all the customer reasons that we talked about earlier in terms of the platform and the product set.
Luv Sodha - Jefferies - Analyst
Great, thank you.
Operator
Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.
Alex Zukin - Wolfe Research - Analyst
Hey guys, thanks for taking the question. So maybe just a two-parter. If we look into the the trends around cloud revenue growth. Is there any way to get a little bit deeper in terms of the exposures for how many contextualize just the customers that are coming from the SMB side versus the enterprise side? And maybe parse out where the trends got worse or stable in December and January? And then similarly, we picked up some anecdotes of server customers maybe wanting to wait a little bit more closer to the end of their service support date before migrating to either cloud or data center. So I would love to just get a sense of what you guys are seeing there versus a year ago or a quarter ago in terms of your assumptions.
Cameron Deatsch - Chief Revenue Officer
Great. Once again, it's Cameron, happy to dive into both those. So first and foremost, on the - what did we see last quarter when it came down to SMB or smaller customer growth versus enterprise. As we've already stated, the primary headwind that we saw more pronounced in Q2 was user expansion within our smaller customers who were largely on monthly contracts or were moving from monthly down to our free tier. So that was definitely the new piece of information that we saw in Q2. On the other side, our enterprise side of our business remain exceedingly strong with migrations with cross-sell with Jira Service Management and Jira Online as well as our addition upgrade standard to premium and premium to enterprise offerings continue to provide very stable growth within our enterprise customer base. Obviously, with more than 250,000 customers, we believe that having such a massive customer base, a mix of SMB and enterprise globally across all industries and geographies is a massive advantage long term for our business. As those small businesses become big businesses or more importantly, see people going from small companies into big companies and bringing the preferred tools and standards with them. And that's been core to the Atlassian strategy for some time.
To answer your question on the server side of things, that's more good news. Like as I already mentioned, this whole transition of server customers migrating to their data center or cloud is a multiyear journey. And obviously, the core focus there was to migrate customers to the cloud, and we are largely in line with all of our goals that we have set for migrations ever since we started this journey a couple of years ago. However, when we did this, whenever you announce an end of life of a product, we know we're going to lose some customers through the transition. And the good news here is, over the last couple of years, we've seen an increasing number of customers move to data center, and you see that in the numbers, but as well as many of customers staying on server for longer than we expected. That's actually a good thing. I see that customers will continue to go - until February 2024 before they're going to choose go into cloud or going to data center. But overall, it shows our ability to retain our customers, shows how sticky our products are and shows how mission-critical our applications are going forward. And as I mentioned, whether it's customer choose a server to data center or data center or server to cloud, all that shows future investment within Atlassian and commitment to our products. And I feel increasingly confident in our ability to get those customers to the cloud over the long term regardless. Thank you.
Alex Zukin - Wolfe Research - Analyst
Perfect. And maybe just small, small follow-up. Dan, is it possible to - is that percentage of SMB enterprise for cloud, is that 50-50? Is it - from a revenue basis, is it much more weighted towards SMB than enterprise. Any kind of quantification there?
Cameron Deatsch - Chief Revenue Officer
Yeah, we do not break out the split of SMB versus enterprise. As I mentioned before, the one uptick in headwinds we saw in Q2 was the SMB user expansion. Our enterprise business continues to remain strong.
Alex Zukin - Wolfe Research - Analyst
Perfect, thank you, guys.
Operator
Your next question comes from Michael Turits from KeyBanc. Please go ahead.
Michael Turits - KeyBanc - Analyst
Yeah I think - well, I think I'll take the question regarding developer headcount, because obviously there's been large numbers of headcount cuts in tech. For the most part, you don't hear any discussion of it being better or worse for development engineering. But what are you seeing out there since where you came from is still on developer side? What are you seeing in terms of your selling into that user case of the development team? Is that getting impacted the same or disproportionately than others as people maybe slow down on new development projects if that's what we're seeing?
Cameron Deatsch - Chief Revenue Officer
Yeah, we've taken - so as I mentioned, back to the one primary headwind we have seen that was different in Q2, which is user expansion within our smaller customer base. When we look into that there's no competitive differentiation. There's no competitive dynamic that's changed. So it's not like people are choosing other options or turning to other products that we see that some new competitive offering. It's largely these customers slowing down their hiring, potentially trying to consolidate some of their licensing and the software that they purchased over the last couple of years. But we believe long term, technology is still a major driver of growth across many different companies in many different industries. And that will only continue to grow across all geographies. So we look across our entire customer base. We see it's not just the tech or engineering-focused companies, but it's in the companies in every industry, every geography have adopted technology and we see that why whenever we look at these trends that are happening, that happens broadly across all these different customer bases. So long term, we believe, is there going to be more technology, more developers in the future that are going to use our products to get their work on and collaborate with the rest of the business? Absolutely. And we are set up with our multiple offerings to take advantage of that growth.
Michael Turits - KeyBanc - Analyst
Okay, but no relative difference in the DSL between serving teams for software developers versus for IT versus for work - for enterprise for business? Is that correct?
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Yeah, it's Scott. Michael, let me chime in on that one. Look, just a reminder, we always started early on serving just the developer in an organization, the person writing code. We've long been around helping those developers collaborate with the rest of the organization. And so I believe that our latest number is something like quarter of the users into software are developers writing code and the rest of it is your product managers all the way through to designers and we - a lot of our benefit we get is exactly coordinating the work of the broader software and technology organizations through our [Indecipherable] offering and now broader into the IT teams out there. And so whilst we - sort of core of what we do is helping developers like the broader problem we solve is actually how people get work done across their organizations. And that's I think where we remain strong versus maybe point of development products that are really just for developers. And the other part is I echo Cameron's is that - no one - it's still early in the days of layout and other things of other companies. But I haven't heard that these developers, I'm not getting other jobs elsewhere. What I'm finding is those companies that struggled to hire developers previously are now able to pick up people where they couldn't before. And so I think that further proof points that development is not - and software more broadly is not going anywhere as the long-term trend. And so yes, the [Indecipherable] bumps up and down, like I said we're seeing. [Indecipherable] five developers sitting on an unemployment line for very long just because the long-term trend is more and more software.
Michael Turits - KeyBanc - Analyst
Thanks.
Operator
Your next question comes from Arjun Bhatia from William Blair. Please go ahead.
Arjun Bhatia - William Blair - Analyst
Perfect, thank you guys for taking the question. I wanted to touch on JSM and the ITSM opportunity. You certainly talked about that a lot in the shareholder letter. And from what we can pick up, there's a lot of customer partner excitement about the product. How do you - how are the capabilities that you've developed with JSM compared to some of the larger incumbents that are in that market? And as you are increasingly selling JSM, how are you positioning it to larger enterprise customers that may already have an ITSM solution in place?
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Thanks, and that's a great question. We built our ITSM solution in three areas that I - remain the reason to why our customers buy it. One is it is like a consumer-like offering out there, and people will choose to use something else at the back end and install JSM at the front end because of its consumer-like offering. And so in some situations in very large organizations we find coexistence with existing solutions where we get put in at the front end to all systems there. I guess that's just sort of proof point that's a great advantage for us. The second is our time to value, and that time to value means that we can target the Fortune 500,000 [Phonetic] with our solutions, whereas many of our competitors targeting enterprise - target a much smaller subset who are willing to pay for the financial services in the six-month to 12-month onboarding and all the stuff that goes along with that. And so that's our second value prop. And the third value prop for us is that we bring IT and development closer together and no one else can say that. And again, that's been the history of our long association with our developers work and deep integration with all of their tools. And so our approach to this market is a long-term one. We're not aiming to go take the largest customers in this IT market to start with because if you did that, you end up with a check box feature delivery mechanism where you need to check every box in order to switch something out. And that's not the approach we want. We want to build a product that is loved by people long term and serves the Fortune 500,000. And so looking at a lot of these instances [Phonetic], we find a coexistence where people want the things that we can bring that the incumbents can't, but they haven't got the bandwidth or the desire to break out some of the core systems that those large incumbents provide. In other cases, where you just don't operate in that space at all. But we're very happy with the small, mid-market sales that we make and the coexistence in those large areas. And for us, it's a long-term gain, and we believe those three advantages will play out over time.
Arjun Bhatia - William Blair - Analyst
Yeah, thanks. That's very…
Cameron Deatsch - Chief Revenue Officer
Sorry, I'll just add a couple of other items just from our go-to-market side of the house because obviously, we've espoused the benefits in share-expansion for some time. But even the last month, we've taken advantage actually of like, listen, there is macroeconomic uncertainty. People are trying to save money. In Jira Service Management, we actually increased the entry level from three agents for free to 10 agents for free, which actually is for - like if you think about it, a company of 200 people will largely have 10 agents at most. So we are helping really get many, many, many of our existing customers or new customers coming in the door to start using Jira Service Management in anger [Phonetic] at no cost whatsoever. And of course, over time, we will continue to get them to upgrade the paid plans or move to premium versions of our products. So once again, in this downturn, we're taking advantage to capture market share. And then on the larger side of the house, like while we absolutely go into, hey, how do we start at a team or in a department, where can we basically help companies be a little bit more nimble, a little bit more fast and not have to think about it ripping to replace the entire IT platform, that's been our primary strategy. However, there are many companies out there that are trying to save money, trying to consolidate spend, and Jira Service Management is a massive massive savings compared to many of the alternatives in the industry, and we give a great compelling offering for customers to move to. So we've seen other strategies across the board pay off in the recent quarters.
Arjun Bhatia - William Blair - Analyst
Perfect, thank you very much, very helpful.
Operator
Your next question comes from Ryan McWilliams from Barclays. Please go ahead.
Ryan McWilliams - Barclays - Analyst
Thanks for taking the question. So data center continues to gain share as a percentage of your sales. Are you seeing stronger-than-expected migrations to data center instead of cloud at this point? And what is driving the commentary for moderating data center growth in the second half? Thanks.
Cameron Deatsch - Chief Revenue Officer
This is Cameron again. And yeah,, data center is a fantastic offering. I just have to say that. There's a reason people use data center, it provides the scale, mission criticality performance that many of our customers demand, especially many of our largest enterprise customers. As I mentioned prior, this is all about a multiyear journey away from server and to cloud and data center. And we've been making cloud the primary destination for these customers. And we've been seeing those migration rates to cloud, hitting very much in line with our expectations. However, many of the customers that potentially we might have seen say on server longer or potentially go to alternative solutions are choosing data centers. So we have seen data center continue to be an increasing space of demand for many of our server customers in the interim. But I also need to call out that the path from server to data center is not a dead end. We treat - continue to see many people moving from data center to cloud. In fact, half of our migrated paid seats that go from on-premises come from data center customers to the cloud. So we see this as just a - moving to data center is a great thing. Future investment in Atlassian, it's more commitment to our products and absolutely sets us up for future cloud migrations in the years to come.
Joe Binz - Chief Financial Officer
And then Ryan, to take the second part of your question. In terms of the guide, we continue to expect data center revenue growth to moderate in H2. Now that's primarily because we're lapping some of the event-driven growth in the prior year. I would also highlight though, our outlook is better than we expected three months ago, driven by the strong Q2 billings performance that we saw. And then lastly, it's always good to remind everyone that data center revenue growth can be volatile given the portion of upfront revenue recognition in DC sales. So as you think about the DC business performance, keep that in mind as well as some of the pricing changes that are being implemented this month.
Operator
Your next question comes from Ittai Kidron from Oppenheimer. Please go ahead.
Ittai Kidron - Oppenheimer - Analyst
Thanks. I want to go back to work management at the last Investor Day, this was one of the three key pillars of growth for you going forward. And not mentioned even once in your press release, which I found quite strange. Can you - outside of Confluence, can you talk about the rest of the portfolio there? Would it be fair to say that growth over there is perhaps underwhelming that competitively you're not getting the win rates that you'd like to see against [Indecipherable] of the world. Help me understand why such an important area of investment growth is not mentioned even once in your press release.
Joe Binz - Chief Financial Officer
Well, no, I wouldn't be curious at all. Look, I think we're incredibly bullish on work management. So to your [Indecipherable] I don't think so. I would say it's at a different point in its life cycle as a market currently to where ITSM is, which is why us calling that out particularly in the press release. There are no favorite children at Atlassian, don't worry. Atlas is doing really well, right? But it's a very new product. We always say it takes two, three, four, five years to build a great product and a franchise, and with patient long-term investors towards doing that. Everything in Work Management is targeted towards the Fortune 500,000. So Atlas and Jira work management, both of which are our newest offerings in that space, it's early in their journey. I can't say that enough, but we're pretty bullish. Both Scott and I have been around two decades now and seen plenty of 1.0 products and 1.1 products and 2.0 products and understand how product [Indecipherable] codes of adoption work in our customer base. And so we are working diligently on that and both the teams are working really hard there.
Confluence continues to go from strength to strength. It's always been a shining light in the Atlassian portfolio and continues to be so. So it doesn't mean from the press release or anything else that we aren't there. Again, we continue to get analyst recommendations and products in various different waves and charts and all the different bits and pieces there. And we continue to get great encouragement from our customers that we are the only work management vendor at scale, and we're one of the largest scale work management vendors out there that combines their technical and nontechnical teams. This is increasingly a challenge for customers as look across all sorts of different work that they're trying to manage. Just as Cameron and Scott were talking about, ITSM being close to the modern ways of operating DevOps and DevSecOps and everything else. Same with work management, how do you get your marketing and finance and business teams closer to your engineering and operations teams, that's a huge strength of ours in the area that we continue to do well from.
Ittai Kidron - Oppenheimer - Analyst
Very good. I appreciate it. Thank you.
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Can I just come in there if I - just before we move on because - one thing we tried to do, we've got so much great news at Atlassian. And one thing we try to do with our shareholder letters, we focus on one of our three markets at a time. And so last quarter, we focused entirely on work management and this quarter, we chose another market. And so hopefully, we don't - continue to - we're doing that. But what we really wanted to do is go deeper on one market at a time to help educate our investors. And so I want to get that across to people who maybe next quarter or week ago [Indecipherable] something else. And that was the intent behind it. And again, things like [Indecipherable] the collaborative work highlighted were a strong performer within our press release and so forth. But our intent is to go deep once a quarter with one market.
Ittai Kidron - Oppenheimer - Analyst
Thank you so much.
Operator
Your next question comes from Sandy Francis from Citi. Please go ahead.
Fatima Boolani - Citi - Analyst
It's Fatima Boolani from Citi. That's the first time I heard that. Either for Joe or Cameron, I wanted to ask a broader question about your pricing strategy. So we appreciate you've been very consistent and transparent with your pricing increases in the base as it relates to the server offerings and related maintenance offerings as well as data center and data center maintenance. But I'm curious to get your perspective on what type of customer feedback you're getting clearly because we're kind of in a different state of the market environment and in the macro environment. So I wanted to assess if there's maybe potential fatigue from customers in terms of the discussions you're having on this front as you take prices up. And as a related matter, if you raise the floor on the pricing on these predecessors or form factors relative to cloud, why is it that we're not necessarily seeing a more pronounced follow-through in cloud migration? Thank you.
Cameron Deatsch - Chief Revenue Officer
This is Cameron. I'm happy to talk about pricing strategy. It is a large portion of my day. So effectively, I think you nailed one of the key points is consistency. Largely, we've been very consistent in the last few years in the size, quantum and timing of both our cloud price increases as well as our server and data center price increases. And that actually is to our advantage. Many of our customers understand, they expect and they budget ahead of those pricing. You also realize from a macro pricing perspective, Atlassian, our overall strategy is still to be the value leader that we are, when you look to a potential alternatives that at any - we are close to the feature comparison, we are a fraction of the price of those competitors. So we always maintain that from that perspective. I will be perfectly honest, going into this fiscal year and planning out our price increases, the cloud price increases in October and the server data center price increases in February that I had my concerns, I've met with many of my customer - my customer-facing teams, our renewal teams and so on to discuss how we were going to address potential customer feedback, and of course how we're going to plan and address that. I am very happy to say that actually the price increases that we've done recently, both in October and now actually it had no material different feedback from our customers than we've seen in previous years. So I have to say that that's a very big positive for us right now and once again shows the value that our products deliver.
On your next piece is, well, hey, you're doing these price increases, you're doing larger price increases on your server and data center products to effectively more incentivize the customers to choose cloud. And I have to say, actually, that is driving exactly what we've expected on our cloud migrations. And that's why our cloud migrations are going - driving that 10% growth that we've communicated over and again. However, whenever we do a price increase on, say, server or data center, we also see customers having the option to go, “Hey, you know what we are thinking about data center, now is a very, very good time. Let's do that before that price increase goes fully effective.” And we'll see that uptick as well. That's really impossible to understand exactly those dynamics of who's going to choose cloud or data center through all of that. But in general, what we have seen overall is much more customers sticking with us, either choosing to renew server or move to data center or move to cloud than we originally expected when we started this journey a couple of years ago. So overall, no major pushback on our pricing strategy and our pricing strategy is delivering exactly what we engineered it to do, which is to incentivize our customers to choose cloud.
Fatima Boolani - Citi - Analyst
Appreciate it.
Operator
Your next question comes from Peter Wade from Bernstein. Please go ahead.
Peter Wade - Bernstein - Analyst
Thank you for taking my question there. And all the detail that you've been providing on all these other questions. Going to piece together a couple of comments that you've made so far and see number one, if I'm understanding this and what the implications might be. Correct me if I'm wrong, but it sounds like more of the headcount headwinds you've been seeing are really more on the nontechnical side. I think you had a good case around developers are finding jobs easily and the strength in JSM and things like IT suggesting strength there. So correct me if I'm wrong, that that's where more the headcount headwinds are on the more nontechnical side. And then I'm trying to square that with what I have considered to be a very understandable story for these nontechnical people being a very natural and important part of delivering products. What are you seeing that's driving the weakness in those employees and how your customers are working? Are they changing how they work - how they work? And what confidence do you have that after this macro, they're going to go back to having the scale of teams that they might have had before on the nontechnical side that will bring back the growth on that side of the business?
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Hey, it's Scott here. And I think what you're asking is, hey, there's a lot of tailwind behind software over the last couple of years. What does the future look like in those areas? And I get confidence around Atlassian for a whole bunch of reasons. One is that software is a general category, ain't going anywhere, like it's in every area, whether it's cars or it's delivery or the AI/ML, [Indecipherable] and stuff like that, that's all going to affect every [Indecipherable] all these innovations are going to require software developers. And so there's macro time, like, yes, people rebalancing their software teams at the moment. But the long-term trend is strong, there are going to be more and more people there. Two is that because Atlassian helps connect the entire organization to get work done, and we hope actually [Indecipherable] across the entire organization. We are not to hold in to just the R&D headcount. And so as companies increase all the people involved with technical areas or nontechnical areas, we are there to help them collaborate. And so that helps me do well. Also, if you look at our penetration inside companies, our largest accounts, our smallest accounts, like we still have large increases like we're very well penetrated in the organization. And so I get comfort that over time our seats per customer will go up. And we're not at any sort of point of saturation there. And lastly, if you look at the products, like - our product customer or products to see is still relatively low compared to the opportunity we have ahead of us. And so we've always tried to focus on not the things that do change but the things that don't change over the long term, I know Jeff Bezos talked about at Amazon, that's something they focus on is focus on things - or investments on areas that don't change. And teamwork and humans working together is a problem that's always going to exist over the long term, and that's where our investments have been. So I can't predict the next 18 months what it will look like in the broader macro economy, but I look up and feel we're very well placed for the long term.
Peter Wade - Bernstein - Analyst
Thank you.
Operator
Your next question comes from Mark Cash from Raymond James. Please go ahead.
Unidentified Participant - - Analyst
Thanks for the question. It's Mark on for Adam. I kind of wonder however what Cateno was asking, and I was wondering if you could expand upon the impact of migrating data center and server advantage pricing customers to list pricing in regards to how that's baked into the revenue margin guidance you just provided? Thank you.
Cameron Deatsch - Chief Revenue Officer
Well, I can speak - this is Cameron again. I'll speak to the overall - how we think about the pricing strategy broadly. The idea here right now, as you know, many of our server pricing that we have today, especially for higher-tier customers above 500 users on our 2,000 user 10,000 users are limited. There's a significant price difference between server and data center or cloud. Today, if the customer chooses cloud over data center for those customers, cloud is a less expensive option. However, the bulk of our data center customers are sitting on pricing that is significantly less than our cloud list price today. And what you've seen over the last few years is us doing incremental price increases to effectively close that gap. All that pricing is available online. We expose all of it to our customers. None of it is hidden. All of our customers get the same price. And if you look to our historic price changes over the last few years, you can see that we're slowly closing that gap between legacy data center pricing and our cloud list price. So within the next few years, eventually all customers, at least from a pricing perspective, have the incentive to choose cloud regardless. As far as how much growth that's driving for our business, once again, that goal of 10% of revenue growth in the cloud is coming from these server or data center to cloud migrations.
Joe Binz - Chief Financial Officer
And then, Mark, this is Joe. The guidance - the revenue guidance incorporates what Cam just said. We continue to assume that migrations will remain healthy. And then I would also say from a pricing impact on the model, just keep in mind, we do have ratable recognition on subscription which is over 80% of our revenue. So the timing on the renewals that happened throughout the year, you won't see an impact when we go through those types of pricing changes. So we've also included that in the guidance as well.
Operator
Your next question comes from Ari Terjanian from Cleveland Research. Please go ahead.
Ari Terjanian - Cleveland Research - Analyst
Yes, thank you for taking the question. Just wanted to double-click on some of the investments you're making around the enterprise strategy. Can you just give an update what you're doing there to drive traction and maybe speak to some of the partner consolidation that's occurred recently. And if there's anything you're doing differently there to drive further migration and maybe speak to some of the multi year contracts that were called out most recently to exit this quarter. Thank you.
Mike Cannon-Brookes - Co-Founder and Chief Executive Officer
Yeah, hi, Ari, let me take the first half of that, and then I'll leave Cameron to do the second half on the multiyear contracts. From the point of view of what we are doing, we've been on a long and consistent journey, right? We continue to be long-term oriented and thoughtful about how we approach the enterprise space as one of our major transformation as a business over the last decade, you would argue. In terms of specifically what we're doing? Look, you've seen us continue to open performance and scale. So the scale offering we've continued to move up in the cloud. We now have 35,000 users in GA and 50,000 users is in EAP and you can bet that we have teams continuing to work on those sorts of aspects. At the same time, our performance for individual customers has massively improved at those life scales over time. So it's not just the ability to handle user volume, it is about the performance that those customers get, especially in lower spec to desktop environments with other Internet connections as we continue to get more and more global and have customers and users all around the world.
We continue to work on governance. We're long believers that if you look forward, you're going to have more governmental regulation in different countries, different geographies, different industry areas and that our platform and our infrastructure has to handle that. You saw that this quarter, we shipped a data residency in Germany. We continue in - testing in other regions. We continue to do things like BAF and financial services compliance in different areas of the world, and we'll continue to add more in those areas as we build them out over time. You can see all the details in the outlook that we give over time. And the third part we're working on is continuing in extensibility in the cloud. The reason that, that's an enterprise concern is because obviously the larger our customers are the more they customize our software for themselves. Forge is a fantastic mechanism to customize our cloud offerings for themselves. Larger customers tend to have very bespoke things they want to integrate with various internal systems. The ability to do that have us run it for them, have us handle things like data residency and handle the server loads and everything for them is a huge benefit of the cloud, and we see customers moving for reasons like that. It simplifies their offering, as this is one of our goals with the cloud right. We do all the hard yards so they can just focus on their businesses. Cameron?
Cameron Deatsch - Chief Revenue Officer
Yes, and in addition to all of the R&D investments we've made to better serve our enterprise customers, I am exceedingly happy and proud of what we consider our enterprise transformation on the go-to-market side of our business. We've invested heavily to get closer to our largest customers and help them through this strategic transformation to the cloud while maintaining some of the most efficient sales and marketing spend that you see in the industry. And that's the balancing act that we've had over the last couple of years. But you think we've had much more enterprise account managers to take care of our customers. We invested in technical account managers and solution architects to have more strategic conversations about the road map with our products longer term. We have things like executive advisory boards and deep dives and CIO counsels. This has actually allowed us to have strategic relationships with our customers and think much more long term about how our products will be used in the future in their businesses.
You also mentioned you saw this in our channel with our partners that we've seen significant outside investment as well as consolidation in our massive solution partner network. While we have over 700 solution partners, we see many of these customers - or many of these partners starting to consolidate. I see this as a massive advantage for our customers as these companies provide more scale and more optionality for our customers and once again deliver more value, but also good for our ecosystem. Like any additional investment in our ecosystem will only drive higher, better outcomes for our business and for our customers.
And lastly, on the multiyear piece, it's simply the nature of larger, more strategic deals. If we're going to go into one of the largest banks in the world or a large pharmaceutical or telecommunications firms, and we're having a conversation with the CIO about a transformation to the cloud or enabling IT service management or work management for their organizations, they are going to want a longer-term commitment, and that's where you see these multiyear contracts increasing in the enterprise.
Ari Terjanian - Cleveland Research - Analyst
Thanks.
Operator
Thank you. That's all the questions we have time for today. I will now turn the call over to Scott for closing remarks.
Scott Farquhar - Co-Founder and Co-Chief Executive Officer
Thank you for joining our call today. As always, we appreciate your thoughts and questions and your continued support. And thank you to all the Atlassians all over the world for your dedication and resiliency. We hope that you're able to join us next week, either in person in Berlin or virtually at our Agile and DevOps event, Unleash.
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