Atlassian (TEAM) Q4 2024 Earnings Call Transcript

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Atlassian (NASDAQ:TEAM)
Q4 2024 Earnings Call
Aug 01, 2024, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and thank you for joining Atlassian's earnings conference call for the fourth quarter fiscal year 2024. As a reminder, this conference call is being recorded and will be available for replay on the Investor Relations section of Atlassian's website following this call. I will now hand the call over to Martin Lam, Atlassian's head of investor relations.

Martin Lam -- Head of Investor Relations

Welcome to Atlassian's fourth quarter and fiscal year 2024 earnings call. Thank you for joining us today. On the call with me today, we have Atlassian's co-founders and co-CEOs, Mike Cannon-Brookes and Scott Farquhar; and chief financial officer, Joe Binz. Earlier today, we published a shareholder letter and press release with our financial results and commentary for our fourth quarter fiscal year 2024.

The shareholder letter is available on Atlassian's Work Life 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 insight and commentary for the quarter. So, during the call today, we'll have a brief opening remarks and then focus our time on Q&A. This call will include forward-looking statements.

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

We'd like to allow as many of you to participate in Q&A as possible. Out of respect for others on the call, we'll take one question at a time. With that, I'll turn the call over to Mike for opening remarks.

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

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

We also welcomed Loom into the Atlassian family and introduced Rovo and announced an entirely new era for Jira. We closed out our three-and-a-half-year journey of winding down server and successfully migrated millions of users to cloud and data center. As we continue to partner deeper with our data center customers, they understand that cloud provides the ultimate Atlassian experience with the power of our unified platform and innovations such as analytics, automation, and AI. We've continued to deliver enterprise-grade platform capabilities to this cloud, unlocking data residency in six new regions, increasing the scalability for Jira to support up to 50,000 users on a single instance, and achieve FedRAMP in process designation, a critical milestone in supporting the U.S.

public sector in Atlassian Cloud. These and more are helping pave the way for some of our largest and most complex data center customers as they map out their journeys to cloud. We now have over 500 customers spending over $1 million annually. The progress we've made and the momentum we are seeing in the enterprise segment reinforces our conviction in our strategy to build and deliver solutions that help solve our customer's toughest team collaboration challenges.

We have a massive serviceable addressable market opportunity across our three customer markets including a $14 billion revenue opportunity just within our existing customer base alone. And we are more excited than ever to seize this opportunity and accelerate our path to surpass $10 billion in annual revenue. Lastly, this is Scott's last earnings call. It is truly impossible to put into words the impact that Scott has had on me, on the thousands of employees, hundreds of thousands of customers, and Atlassian as a concept and as a company, over the last 23 years.

It's been an honor to lead Atlassian side by side with him over the last two decades, and I look forward to his many continued contributions to the company as a board member and in his special advisor role. Thank you, Scott. And with that, I will turn it over to him.

Scott Farquhar -- Co-Founder and Co-Chief Executive Officer

Thanks, Mike. I look back on the last 23 years with immense pride about what we've built at Atlassian. We've always believed that only through teamwork can we achieve the seemingly impossible. That's why we spent over two decades building products that enable our customers to do just that.

Our products empower teams at the forefront of innovation from companies leading the next stage of space exploration to those developing groundbreaking medical discoveries that are saving lives. And it feels like we're only just getting started. Atlassian is incredibly well positioned to seize the massive opportunities in front of us across our three markets and in enterprise AI and of course, delivering innovation across the entire product portfolio. I'm more bullish than ever about our strong position to grow and deliver unparalleled value to our customers.

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

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

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Your first question comes from Keith Weiss from Morgan Stanley. Please go ahead.

Keith Weiss -- Analyst

Excellent. Thank you, guys, for taking the question, and Scott, congratulations on a really remarkable career. It's been a real pleasure working with you over the years. So, coming out of a real building year in FY '24.

The FY '25 guidance for total revenue of 16% is disappointing to investors. We see that in the aftermarket reaction. Do you guys remain confident in the longer term 20% plus growth profile over the next three years? Can you help us bridge that equation? Where do you guys garner the confidence for like the 20% plus growth longer term, what are the parts of the equation that are going to turn on, if you will, as we go into FY '26 and FY '27 that we're not seeing today that give you guys the confidence to make that statement with today's results?

Joe Binz -- Chief Financial Officer

Thanks, Keith. This is Joe. I'll start, and then I'll pass it over to Mike for more color. Despite the macroeconomic uncertainty and the execution risks related to the evolution of our go-to-market motion, we believe FY '25 will set us up with a strong foundation to accelerate growth in FY '26 and beyond.

And keep in mind, mechanically, there are a number of difficult prior-year comparables in FY '25 with the end of server maintenance revenue and event-driven purchasing around the server end of support. Longer term, fundamental growth drivers for FY '26 and beyond are very consistent with what we shared at Investor Day back in May. So, it starts with the opportunities we have in our three large markets, those being software, service management, and work management. Those are collectively growing at a solid double-digit CAGR.

We have a $67 billion addressable market opportunity with $14 billion of that in our existing enterprise customer base alone. And then from there, we can drive growth in several ways. We believe migrations from data center, given the size of the installed base will continue to be a driver of cloud revenue growth in FY '25 and beyond. And we're investing and working hard to enable those customers to migrate to the cloud.

In addition to migrations, we have paid seat expansion within existing customers as we move to enterprise and enable more wall-to-wall adoption, then our opportunity to cross-sell additional products like Jira Service Management, Jira Product Discovery, Compass, Loom, and Rovo to our over 300,000 customers is another great opportunity. We have the ability to upsell to premium and enterprise additions of our products, which is another significant growth driver. And then there are other drivers in the model like pricing and new customer growth, which is not significant in the short term, but is a longer-term growth driver. And then lastly, with AI, I'd say we believe we have a unique and differentiated position with data graphs around high-value workloads, and there's a lot of long-term opportunity in that space as well.

So, overall, we continue to expect to drive healthy revenue over the next three years in cloud. And from a data center perspective, that customer base is primarily composed of large customers with very high logo retention. So, growth from the customers that remain on data center will be driven by pricing and seat expansion, and cross-sell. So, overall risks and tough comparables to navigate in the short term but big opportunity in fundamental customer demand are there long term, particularly in the enterprise customer segment, as you can see in the momentum and traction we're getting there.

We cited we have over 500,000 customers spending more than $1 million with us, which is up 48% year over year. So, we feel really good about that. And then I'd just say, overall, we remain confident as ever in our ability to deliver revenue growth in excess of 20% compounded annual growth rate over these few years. Mike?

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Look, I think Joe presented it incredibly well, Keith. Look, if I take -- he has nailed the math there, right? We are incredibly confident in our 20% figure we've given over the next three years and continue to be so today as we were at the Investor Day for all the reasons that he stated and how the math plays out. I will say from a qualitative point of view, the more customers I spend time with, the more confidence I have in that number from -- on the non-math side, I suppose. Most of the large customers I speak to, in fact, all of the large customers I speak to, would tell you that cloud is a when not an if for them.

So, that gap between the server migrations ending and the data center migrations picking up pace, that -- we have high confidence that will mature through in our engineering road map and in the deliveries we have in cloud and how that's resonating with the customers in the stories they tell. Secondly, increasingly, AI analytics and their platform, I mentioned, by those large customers as reasons for moving as well as our cloud delivery. So, our proven ability to deliver as we saw with FedRAMP in process this quarter is resonating with those larger customers. As is the new products that Joe mentioned some also in Loom, Jira Product Discovery, Rovo, Guard, Compass, we have the best slate of new products in the nascent phases that we've had with very high customer resonance when you do qualitative checks with customers.

All of those exist in the cloud, and all of those are going to drive that migration journey. Lastly, I have a huge confidence in our long-term ability to evolve and adapt as a business. We've shown that over more than two decades. We're in one of those adoption phases at the moment as we deal with the enterprise transition, I think, adroitly.

And that evolution capability that Atlassian has will continue as we help those largest customers to go increasingly wall-to-wall across their enterprises. So, huge bullishness for me that we'll hit those numbers that we've given out.

Operator

Your next question comes from Michael Turrin from Wells Fargo. Please go ahead.

Michael Turrin -- Wells Fargo Securities -- Analyst

Hey, great. Thanks. I appreciate you taking the question. Objectively, 30-plus percent subscription revenue growth, 30-plus percent free cash flow margin, not something we're seeing a lot of across software.

But in the spirit of the question is, Joe, you guided Cloud to 32% for Q4. The reported number came at 31%. So, just hoping you could provide some context around what drove the delta in Q4. And maybe just help us frame the approach to cloud guidance for fiscal '25, if there's anything additional you're taking into account, obviously, a lot of moving pieces and factors to consider.

So, any compare and contrast with the approach to guidance here versus prior periods is helpful. Thank you.

Joe Binz -- Chief Financial Officer

Yep. Awesome. Thanks for the question. You're right, revenue was up 31% year over year in the cloud in Q4 that was slightly below our guided range of 32%.

The variance to our expectations there was driven by two factors. One is the timing of high-touch enterprise deals, which landed later than expected in the quarter, and slightly lower-than-expected revenue from data center migrations. So, I'll take each one of those and dive in. From a deal flip perspective, deals closed and billings landed in the quarter just later than we expected, and that impacted revenue recognition.

There were a couple of factors that drove that. The first is what I'd characterize as the evolution of our high-touch go-to-market motions. We are driving larger, more complex deals that include more products and require more approvals. And in some cases, we're targeting large complex migrations and all of that adds up to longer sales cycles than we anticipated.

Second, we always take a very disciplined and long-term-oriented approach as we think through pricing and concessions on these deals. So, we're not deadline-driven. We don't do anything unusual or unnatural. We deal on economics to close a deal at a certain time.

And we're willing to be patient and wait for the right deal for both the customer and for us, and that's what we did this quarter. In terms of the migration miss, overall migrations to cloud were slightly lower on an absolute basis in Q4 versus Q3, and you'd expect that following a catalyst like server end of support with migrations from data center slightly lower than our expectations, as you highlighted. The driver there is the complexity of these migrations. Data center customers are our largest customers with the most complex environments to migrate.

Very different from the one- to two-day migrations that we can do with our smaller customers. Further, many of these customers, when they do migrate, do so taking a hybrid approach over time. And then lastly, many of these data center customers recently migrated from servers. So, there's going to be variability in the pace of these data center migrations quarter to quarter.

And overall, our customers are clear that their ultimate destinations in the cloud, as Mike talked about, it's the best and most secure experience, and it's where all of our R&D and product innovation is pointed. So, they can see the value we're delivering there and have a plan to get there. So, it's just a question of what the timing looks like over the next several years. The last part of your question was on the approach to guidance in FY '25.

And what I'd say here is we have taken a different approach to our guidance this year and that we have taken a more conservative and risk-adjusted view of our revenue outlook entering the year than we did a year ago. We believe this is prudent given two factors. First is the uncertainty we see in the macroeconomic environment, and second is execution risks related to the evolution and transformation of our enterprise go-to-market motion. And so, our guidance balances the trends we've seen over the last year with the uncertainty that is out there, whether it's macro related, or changes we're making inside the company.

And it incorporates the assumption that macro gets worse and execution risks are realized to form a more risk-adjusted and prudent view entering the year than we did a year ago. So, hopefully, that color helps in terms of what we're thinking about from a guidance perspective.

Operator

The next question comes from Ryan MacWilliams from Barclays. Please go ahead, Ryan.

Ryan MacWilliams -- Barclays -- Analyst

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

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Yeah. Hi, Ryan. I can certainly talk to that. It's a great question.

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

And has given us a huge volume of customers and an enviable margin and cash flow profile. We have made a series of evolutions in go-to-market, I would say, over that 20-year period. When we introduced data center, we added Enterprise Advocates. And obviously, we've shown a history of building a significant business in the data center world.

When we added cloud, we learned to sell and migrate, and support customers in the cloud and built a very significant cloud business over time. You've seen us do that. And then more recently, as we added additions in premium and enterprise additions in the cloud. We've added the muscles to be able to upsell customers and explain the success of their moving.

And we have proof points of that in a strong adoption of premium and enterprise. So, a series of evolutions we've had over time gives us confidence that we can continue to evolve and adapt as we have done. As we've talked about more than $14 billion revenue opportunity in our existing base. We spent a lot of time evolving R&D over the last three or four years to better serve the enterprises in the cloud, and we've got great proof points of delivery there.

And now we're continuing to evolve our go-to-market motion to sell, support, and service those largest enterprises. As we said, we've got more than 500 customers that are spending north of $1 million and that's great. We think we can continue to grow that portion of the customer base strongly and that evolution and that desire to keep changing and adapting and improving is one of the things that keeps Atlassian a very special place to work. I do think it's worth saying at the highest levels, too.

It's important that what you can expect not to change in that evolution. First, I would say there is our discipline as a company. We've always prided ourselves on making economical decisions, understanding the deal economics in the enterprise as we do now better than ever before, and being continually capital efficient as we grow that, as you've seen us do. Secondly, the long-term focus doesn't change.

Part of this evolution is looking forward multiple years and seeing how that enterprise part of our business is going to continue to grow and evolve and how we serve those largest of the Fortune 5000 with incredibly complex needs and our opportunity to do so and to help them out in their businesses. Lastly is maintaining a flywheel of our primary land motion for all customers, right? From the SMB customers in the Fortune 500,000 to the enterprise customers in that Fortune 500 and Fortune 5000. I would point out that this enterprise focus is additive, right? Our SMB and product-led growth motions are incredibly important and efficient and will remain so for the business as we keep evolving. Now, to the second part of your question, look, we will -- we continue to focus on the talent levels experience we have as well as growing talent within our business.

There are a lot of areas that we continue to grow as we strengthen our go-to-market muscles to focus on the needs of our largest enterprise customers. We have a proven ability to manage multiple go-to-market machines, I would say, and thread them together carefully, and I'm sure we'll continue to improve and grow that. But really excited about this evolution for Atlassian.

Operator

Your next question comes from Arjun Bhatia from William Blair. Please go ahead.

Arjun Bhatia -- William Blair and Company -- Analyst

Perfect. Thank you for taking the question here. If we can touch on the FedRAMP, the opportunity. It sounds like you're making progress there.

I'm curious how long it might take before you can unlock some more federal deals in cloud. I assume you have a lot of existing federal customers on DC. Are those customers that you can start to migrate over to cloud? Or is there still a little bit of a process to play out before the buying cycle occurs here in calendar Q3? Thank you.

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Hey, Arjun, I can certainly take that. Look, there's no doubt we have a huge volume of very large government customers in data center. And I would also say we have a large number of customers who service government entities who are also in data center who may not necessarily be government entities themselves. But obviously, in light of working with the government need FedRAMP or are easier for them to do businesses if they have FedRAMP capabilities.

So, it's not just about the government, it's the businesses around the government as well, which is a very large segment, as I'm sure you're aware. We have continued to work with a lot of those customers as we've developed our FedRAMP capabilities to keep them on the journey and aware of where we're at. And I will say our cloud road map delivery is a really important point there. The last couple of quarters, we've hit 100% of items on our road map at or before the time and this resonates with customers.

So, you can look just as they can at our future cloud road map that is online to talk to compliance, to scale, to performance, and to all the other things that we're building into that road map. We have a series of customer examples who have stated as they've moved to hybrid ELA. I can give a very large global aerospace and defense company. It's a sort of 20-year customer of Atlassian.

That signed a hybrid ELA this quarter for the next couple of years and stated that FedRAMP and the inroads we've made in cloud security on the road map are all that reasons as to why they signed such a deal and moved forward. So, that gives us great confidence as we move to the in-process designation of FedRAMP but also HIPAA and all the other compliance standards that we've shipped as well as data residency, and gives great confidence that we can move there. And obviously, BIO-key as well, bring your own key encryption capabilities for this customer segment. So, for data center customers migrating, there is a multiyear journey for a lot of these very large customers.

Again, the reason that company signed hybrid ELA is to enable them to start moving some workflows and loads to the cloud as the workflows and loads they have on-premise will continue there. And they'll move into a hybrid state for probably a multiyear period before being entirely in cloud. And we encourage them to do that. It lets them test and learn about cloud.

It will let them see the strength of cloud, and they will move that over time. I think that's a pattern we'll see with a lot of these largest data center customers that can have tens, hundreds, sometimes even thousands of JIRA and Confluence service running across their enterprise. This is a huge ability. This latent demand for Atlassian products and latent demand for cloud to kind of think about it that way, is a big strength of Atlassian, we look forward over the next few years.

And I'm confident in our ability to unlock that and FedRAMP will be a huge unlock for government and government-adjacent customers.

Operator

Your next question comes from DJ Hynes from Canaccord. Please go ahead.

Unknown speaker -- -- Analyst

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

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Luke, certainly great question. Luke, I can say, categorically, it's been a positive from customers' point of view. That one is a very, very easy answer. The system of work that Atlassian has continued to communicate and being sharper on over the last few quarters is very resonant with customers.

The reason is a lot of our customers are incredibly technology-driven companies. They realize that technology is their core competitive advantage going forward in their business. Whether they're building cars or rockets or fantastic healthcare advancements or whether they're building databases, right? Whether they are a technical or a nontechnical company, they realize the technology is their core fundamental advantage. And in doing so, they realize that getting their technology teams to work closely to their business teams and to exchange data back and forth, and to be able to work in common set of tools and a common set of patterns is incredibly important for them to win in that technology-driven era.

That's one of the reasons why, although Jira Work Management was doing incredibly well as a product, and we were very bullish on it. We took the decision to merge the two into a single Jira to allow technology and nontechnology teams to work together. That has been incredibly well received by customers. It allows them to achieve those goals that they have, right? We have a series of stories where it also leads to two factors for Atlassian.

Firstly, it allows the customer to consolidate on Atlassian of other work management tools because they have a singular cloud platform. And in the era where consolidation is incredibly important, that timing works very well for us and for them. We can talk to a company like Rivian that took five different work management tools and consolidate on the Atlassian Cloud due to the combination of Jira Work Management and Jira Software, saved them over $2.5 million annually and expanded their use cases for Jira into many other business teams. And secondly, for Atlassian, it allows us to expand our seat count because the technology teams within an organization are a relatively small proportion, depending on the organization can be from 5% to 25% or 30% of an organization.

The other 95% to 70% of the organization is business teams that still have workflows and project capabilities they need. And Rivian is a good example where we've seen that where we've got both consolidation and seat expansion for Atlassian due to the system of work, and the platform that underlies all of our products. So, incredibly good customer reception from this move. And as we continue to do Atlassian over the long term, it's about listening to customers and understanding what they need and trying to deliver that in our product portfolio, in our R&D, and also in our go-to-market motions and how we explain to customers what it is that we do and help them with.

Operator

Your next question comes from Fatima Boolani from Citi. Please go ahead.

Fatima Boolani -- Analyst

Hi. Good afternoon. Thank you for taking my questions. Joe, this question is for you.

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

Joe Binz -- Chief Financial Officer

Yeah. Thanks for the question. I'll keep it at a fairly high level in terms of the execution risk we see in that transformation or evolution of our go-to-market enterprise sales motion. As you pointed out, there is leadership transition there.

And so, that's always something you want to keep in the back of your mind as you think about forecasting over the next year. And then I would just say it's a nascent capability that we continue to build and develop over time. And Mike highlighted the fact that we've been investing in the space. We have a foundation.

But as we continue to make more and more progress, we're going to continue to evolve and build that. And whenever you're doing that, that involves risk in our execution against that level of change. So, from a high level, those are the two big factors, and I'll let Mike fill in the details on this.

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

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

As I said, we are searching for a transformational CRO, who can continue to drive the next phase at ever-increasing scale. That search is well underway. And in the short term, look, I personally led and built the go-to-market engine we have today for our first 17 years, I guess, and continue to be incredibly heavily involved there and with the customers. Also, we have an incredibly strong executive team.

I would argue the strongest we've ever had across the business. So, incredibly confident we can lead the business strongly through that evolution. I think Joe has spoken well to the prudence of our guidance in light of this transformation, but more in light of the other things he has mentioned, the other factors that go into that there. And I think you've seen from us prudence and careful thought as well as hopefully openness and explanation about what it is that we are going through as we focus on the long term.

And lastly, I would reiterate our deep belief and confidence in the 20% multiyear revenue CAGR that we've given out at Investor Day, and we would maintain those targets, both on the revenue side and on the returning to historical operating margin side.

Operator

Your next question comes from Brent Thill from Jefferies. Please go ahead.

Brent Thill -- Analyst

Thanks. Joe, as you know, the central question investors are asking us is the cloud guide, and ultimately, are you putting a little more conservatism into this forecast to give yourself more wiggle room? It's been -- I know it's been a challenging thing to forecast, given a lot of different factors. But has your approach changed here? Has anything changed in the underlying assumptions to give investors more confidence that they can really believe in that number? The second one was just a follow-up on two months ago, you guided 20% top line, you are guiding 16%. Should we think differently now about the long-term growth? Or is this more of a tactical pit stop and you still believe in 20% over a period of time? Thanks.

Joe Binz -- Chief Financial Officer

Yeah. Brent, thanks for the question. In terms of the revenue guidance, I'll just reiterate what I said earlier in terms of our approach, we are taking a different approach to our guidance this year. It is a more conservative and risk-adjusted approach.

And the reason and the drivers for that are the risks and uncertainties that we talked about. One is we see uncertainty in the macroeconomic environment. And second, the question earlier, we do see execution risk related to the evolution and transformation that we're undergoing on the go-to-market side. So, we've taken all of that into account.

And the net result of that is we have a more risk-adjusted and prudent view this year going into the year than we did last year. So, we have adjusted slightly to that. In terms of the cloud revenue and revenue overall, we are still committed to a three-year 20%-plus compounded annual growth rate on revenue. We talked earlier about the drivers of that.

Nothing has changed in the last three months since Investor Day when we made that. We continue to reiterate our confidence around that, and we talked earlier on the call about the drivers behind that.

Operator

Your next question comes from Alex Zukin from Wolfe Research. Please go ahead.

Alex Zukin -- Analyst

Yeah, hey, guys. I think maybe it would be helpful to just unpack kind of similar to how you at least commented in the letter on the margin side around the headwinds that investors should -- or the tailwinds that investors should recall that were onetime in nature on operating margins in fiscal '24, such that ex that the fiscal '25 margin guide is actually flat? Similar to that framing, if it's possible just to understand. If you look at the guide that you gave for 16% total revenue growth, but that's in light of these one-time tailwinds of end-of-server conversion because, I think, if I adjust for that, the guide is actually closer to 19%. So, just help us frame that because that's obviously not going to recur.

And presumably, it appears from your commentary that the guidance is more incorporating timing of certain deals closing on the enterprise side, maybe migrations on the enterprise side, that's informing the conservatism. But just maybe help better understand that a little bit.

Joe Binz -- Chief Financial Officer

Yeah. Alex, this is Joe. I'll take a shot at that. I think first of all, you started from an operating margin perspective and what are the factors there that are driving the lower year-over-year operating margin? As you pointed out, we expect our non-GAAP operating margin to be 21.5%, approximately in FY '25.

That's about 200 basis points lower than FY '24. Keep in mind, as you pointed out, our FY '24 non-GAAP operating margin benefited from the significant outperformance in data center and marketplace revenue related to server and to support in H2. That impact was about 200 basis points. And so, when you normalize for that impact, our FY '25 operating margins will be roughly flat year over year.

In terms of the cloud revenue deceleration and the comps there, we do believe cloud revenue growth will decelerate in FY '25. And the primary driver is we expect less contributions from server migrations now that we're past server end-of-support. And while data center migrations will increase, they won't make up for the decrease in server migrations. Given the migration path for many of those customers, as we've talked about earlier, will play out over a multiyear period with many evolving hybrid deployments.

We've also incorporated, as you pointed out, prudent assumptions to account for the impact of worsening macroeconomic environments and execution risks in our enterprise go-to-market motions. So, those are some of the factors that are driving that year-over-year deceleration in cloud revenue. Now, having said that, we pointed out in the call we remain optimistic long term and expect cloud revenue growth to accelerate in FY '26 as we lap the drag from server end of support and drive improving seat expansion, cross-sell of additional products, and upsell to premium enterprise additions of our products that we talked about earlier.

Operator

Your next question comes from Gregg Moskowitz from Mizuho. Please go ahead.

Gregg Moskowitz -- Mizuho Securities -- Analyst

OK. Thank you for taking the question. I had a follow-up on a couple of the go-to-market questions from earlier. Mike, you're looking, as you said, for a new CRO with expertise in leading enterprise sales transformation.

But how do you define an enterprise sales transformation? And more specifically, how much do you foresee your go-to-market changing Atlassian, both in fiscal '25 as well as over the longer term?

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Hey, Gregg, how much is an interesting question. Look, I would say that we are -- continue to be a very long-term thinking company. And when I'd say that, I mean, at Investor Day, we talked about our R&D spend as a percentage of revenue moderating when we gave our long-term targets and our sales and marketing spend increasing from roughly that sort of 15%, 16% range, moving north of that. So, you can see implied in that that there'll be increasing spending, but I would argue in a cautious and careful way.

And we're very good at the capital efficiency, the calculation of where the ROI on that spend is. And it's a relatively moderate increase in spending, especially when you compare it to our comps in the market and other companies, right? We'll still be after that transition comparatively efficient on sales and marketing to most other software companies and still comparatively high spending on R&D because we believe that's where our fundamental advantages are. So, think about this as an evolutionary and adjustment in that manner. Now, the transformation is about how we continue to take those 500 customers spending more than $1 million.

And the huge latent demand we have in data center and increasingly build deep partnerships with some of our largest customers in how we are helping them transform their businesses. This is a part of our evolution, right? I've talked about when 15, 17 years ago, when we started the data center business, we were talking about moving $5,000 customers to be $50,000 customers. And we're a long way from that nowadays, but this is something that we are familiar with. There is a history of the evolution that we've had.

And I think it's a very smart example of how Atlassian continues to evolve through the years in ways that benefit our customers. In this case, we're looking at our largest customers that are -- when you speak to them, they're betting incredibly hard on Atlassian. They think that we are transforming the way that their company works. They want to roll out to ever-increasing numbers of scale, and they want to understand the philosophies of how we were together and build a partnership across our portfolio of products.

That's what we mean by that enterprise transformation and how we sell, support and ultimately make successful those largest customers. Lastly, I will point out that we believe this is additive to our model, not a swap or a switch. We have a great capital-efficient flywheel in the product-led growth motion that we have at landing large numbers of SMB customers, but also landing in those enterprise customers, which is what makes the enterprise motion more efficient for us than other companies. So, they work together in harmony.

Operator

Your next question comes from Kash Rangan from Goldman Sachs. Please go ahead.

Kash Rangan -- Analyst

Hi. Thank you very much. So, Mike, a question for you with -- these transitions can be very hard, certainly the goal is to come out more successful as a company. And clearly, you're on the way.

As you've come out of the transition, what are the lessons learned? And how can there be further tweaks to the product strategy, go-to-market? I guess we all learned from the most difficult challenging times, and we've come out mostly ahead. So, what are the things that you have learned that you're going to adopt to the strategy of company going forward? And also, from a bandwidth perspective, you're in an unenviable position. You're now twice the CEO that you were before with Scott, of course, he's on the board now, and then you're looking for a CRO. I mean, there are some big shoes to fill.

And you talked about -- Joe very eloquently talked about the what -- how the different levers that exist in place to get the company to potentially accelerate. And one of the very first questions I had. But I'm more curious about the how you get there. What are the things that are being done internally differently.

I know it's the long, rambling, complicated question, but I just wanted to hear you out a little bit more in depth as you sort through all this stuff. Thank you so much.

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Sure, Kash. I'm guessing I'm going to take that one. Look, I'd say a few things. Firstly, I think I would start with saying we have an incredibly strong executive team.

So, a lot of the implication of your question is this all going to fall on my shoulders? And there's no doubt ultimate accountability does, I'm very comfortable with that. But at a high level, look, we have a great executive team. We have a great sales leadership team at the moment, and we are well familiar with this evolution and transformation motion and having it play out over the quarters and the years. This is not something that starts on July 1 of this quarter.

This is something that's been going for a while. As you can see, we have more than 500 customers north of $1 million. This is not an entirely new motion for us, right? This is an evolution. There's nothing broken here, right? We're just continuing to improve and grow and stretch as we have done for a long time.

The mix shift of being more and more additive in the enterprise, as we said, has come on the back of a huge amount of R&D investment into everything from data residency and BYOK to scale in the cloud to FedRAMP. And now, we believe we have the opportunity to increase our footprint in that enterprise customer base in all of our customer markets, I would say, from software teams. And in ITSM, you've seen how strong the Jira Service Management business is at the moment and through work management and collaboration as the system of work rolls out and we get a hard footprint. So, I think we feel the opportunity is there, and we're going to go after that.

I think when you talk about what lessons have we learned. Look, we continue to see great sales execution as we go through. Team '24 was a huge event for us in terms of a lot of things, product launches, but also in terms of pipeline build, it was our largest enterprise event that we've ever held and the confidence that comes from those customers often informs us in making these DC solutions and movements. I would say that our strength as a company has always been our ability to learn and evolve.

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

Operator

Your next question comes from Nick Altmann from Scotiabank. Please go ahead.

John Gomez -- Scotiabank -- Analyst

Hey, guys. This is John Gomez on for Nick Altmann. You guys outlined some interesting examples at the Analyst Day in terms of the product adjacencies with Loom and the Core. So, now that Loom has been part of a lag for a couple of quarters now.

Can you give us a better sense of cross-selling traction there? And as it pertains to FY '25, do you have any goal posts for how we should be thinking about the Loom contribution?

Joe Binz -- Chief Financial Officer

Yeah. Thanks for the question. I'll take part of that, and then Mike will follow on. You asked about the FY '25 impact that Loom will have.

Within our overall revenue and operating margin guidance for FY '25, we expect Loom to have about one and a half to two points of impact on FY '25 cloud revenue growth for the year. And consistent with our prior expectations, we expect Loom to be slightly dilutive to FY '25 operating margins. And I'll turn it over to Mike on the cross-sell.

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

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

So, our bullishness of the product and the product sector is still increasingly -- is still very high. Secondly, as a product, it continues to sell very strongly independently of Atlassian. And that's always the first step. I would say we've added a small amount of topspin to the business in terms of how it actually sells, and Loom AI continues to sell and drive a change in Loom in and of itself as our ability to edit video, just as you would edit a text document rings true, both with customers and also in the delivery of the product.

We are continuing to integrate Loom into our business practices as we do, so into the Atlassian Cloud platform into a broader sales and marketing execution machine. That integration does take some time. We get better at it with each evolution, but there's sort of a two-stream effect there. One is the product continuing independently to sell strongly by itself.

And secondly is the integration into our broader platform and the role it plays in the system of work. Maybe lastly, I would say that the team -- the Loom team that's joined us and the additional Loom mates we've added to that continue to deliver a very strong product road map. If you look at the recent launches in Loom around integrations with Jira and Confluence, but also in Loom AI skew and continuing to work on you can just since added video. I think the product delivery there is going to continue to be important as we build the momentum in the Loom business.

Operator

Your next question comes from Keith Bachman from BMO. Please go ahead, Keith.

Keith Bachman -- Analyst

Hi. Many thanks for the question. Joe, I want to direct this to you. I appreciate your comments on being a bit more conservative on the outlook.

And I wanted to tie that to some of the conversations we had in Vegas. And particularly, as we think about the outlook for the year, in cloud and data center. Just how are you thinking about two variables that would contribute among others, but in particular, as it relates to seats and pricing? How are you thinking about what the contribution from those in order to realize the targets that you've laid out for the year?

Joe Binz -- Chief Financial Officer

Yeah. Thanks for the question, Keith. From a paid seat expansion perspective, our expansion rates in Q4 were consistent to Q3. That's an encouraging sign.

But one data point is not a trend make. And so, we are assuming that we'll see continued pressure in paid seat expansion in FY '25. And that speaks to the risk-adjusted approach we took around macroeconomic. In terms of pricing, we continue to expect to have pricing increases throughout the year.

That will be a driver of cloud revenue growth as it has been in FY '24 and prior. And so, you should expect to see a similar impact in FY '25 going forward.

Operator

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

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Thanks, everyone, for joining the call today. Appreciate all of your thoughtful questions and continued support. I guess I just want to add a small note on a personal level at the end here. It is Scott's last earnings call, and you've all spared him some questions today, which I'm sure he is very grateful for.

When Scott sits down with graduates when they join Atlassian or with any new staff members, one of the things he said for more than two decades now, is it the one thing you want to leave them with is that they should leave Atlassian a better place than they found it. They should not treat it as a finished object, but rather a continued construction project that gets better and better, and that if they leave the company better than they found it, that's the only thing they walk away with that we will all benefit. And I say that because I think if there's one person who's left Atlassian better than he founded it, it is Scott. And on behalf of the leadership team of the 12,000 current Atlassians and the 20-odd thousand, I don't know how many Atlassians there are past and present together.

We all owe him a huge set of gratitude and thanks for leaving Atlassian better than he found it. Is an underestimation for just a magical place to work and a fantastic and different company. And from me, personally, and from everybody else, thank you, Scott, for everything you've done to contribute to the business we have today and the place we are all lucky enough to get to work every day and for a long time to come. So, thank you very much from me.

We love you a lot and we wish you the best in all future endeavors. With that, have a great day, everyone, and have a kickass weekend.

Duration: 0 minutes

Call participants:

Martin Lam -- Head of Investor Relations

Michael Cannon -- Co-Founder and Co-Chief Executive Officer

Scott Farquhar -- Co-Founder and Co-Chief Executive Officer

Keith Weiss -- Analyst

Joe Binz -- Chief Financial Officer

Mike Cannon-Brookes -- Co-Founder and Co-Chief Executive Officer

Michael Turrin -- Wells Fargo Securities -- Analyst

Ryan MacWilliams -- Barclays -- Analyst

Arjun Bhatia -- William Blair and Company -- Analyst

Unknown speaker -- -- Analyst

Fatima Boolani -- Analyst

Brent Thill -- Analyst

Alex Zukin -- Analyst

Gregg Moskowitz -- Mizuho Securities -- Analyst

Kash Rangan -- Analyst

John Gomez -- Scotiabank -- Analyst

Keith Bachman -- Analyst

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