U.S. Markets closed

Atlassian Corporation Plc (TEAM) Q3 2019 Earnings Call Transcript

Motley Fool Transcribers, The Motley Fool
Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Atlassian Corporation Plc (NASDAQ: TEAM)
Q3 2019 Earnings Call
April 17, 2019 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen. Thank you for joining Atlassian's Earnings Conference Call for the third quarter of fiscal 2019. 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 Ian Lee, Atlassian's Head of Investor Relations. Please go ahead.

Ian Lee -- Head of Investor Relations

Good afternoon, and welcome to Atlassian's Third Quarter Fiscal 2019 Earnings Conference Call. On the call today with us, Atlassian's Co-Founders and Co-CEOs, Scott Farquhar and Mike Cannon-Brookes; our Chief Financial Officer, James Beer; and our President, Jay Simons.

Earlier today, we issued a press release and a shareholder letter with our financial results and commentary for our third quarter of fiscal 2019. These items also posted on the Investor Relations section of Atlassian's website at investors.atlassian.com. On our website, there is also an accompanying presentation and data sheet available. We'll make some brief opening remarks and then spend the rest of the call on Q&A.

Statements made on this call include forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. 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. For further information on these and other factors that could affect the company's 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 the most recent Form 20-F and quarterly report on Form 6-K.

In addition, during today's call, we will discuss non-IFRS financial measures. These non-IFRS financial measures are in addition to and not a substitute for or superior to measures of financial performance prepared in accordance with IFRS. There are a number of limitations related to the use of these non-IFRS financial measures versus the nearest IFRS equivalents and they may be different from non-IFRS and non-GAAP measures used by other companies. A reconciliation between IFRS and non-IFRS financial measures is available in our earnings release, our shareholder letter and then now in the updated Investor Data Sheet on our IR website.

I'll now turn the call over to Scott for his brief opening remarks before we move to Q&A.

Scott Farquhar -- Co-Founder and Chief Executive Officer

Good day, everyone. Thanks for joining today. We had another great quarter. In Q3, we achieved $309 million in revenue, up 38% year-on-year and also generated more than $127 million of free cash flow. Over last week, we got to share many of our written product innovations and announcement at one of our favorite events of year, Atlassian Summit, our flagship user conference. This was our 12th summit and the first time we've held it in Las Vegas.

When Mike and I had our first summit 10 years ago, we could barely attract few hundred people, so it's both tumbling and awesome to see almost 5,000 people joining this year. We shared some of the biggest products announcements in our shareholder letter. Now there is too many to list, but I'll just remind the few. We've launched Premium versions of Jira Software and Confluence in the cloud. We shared a number of new cloud features such as the introduction of Encryption at Rest and the early access launch of support for 100 -- sorry for 10,000 users.

We welcomed AgileCraft, the newest member of the Atlassian family and rebranded as Jira Align. And we showcased Jira Software 8.0 server and data center and even faster and more powerful version of Jira for our on-premises customers. I particularly like to thank those of you who are able to attend our Investor session at Summit. It was great to see so many of you there in person and see your enthusiasm for Atlassian. Both Mike and I and the team here appreciate your continued support, and we look forward to chatting again soon.

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Gregg Moskowitz with Mizuho. Please go ahead.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Okay. Thank you very much, and good afternoon, gentlemen. Maybe just to start off, I know that you don't guide to it, but your deferred revenue did come in a fair amount, lower than most people were expecting. So, I guess, I'm just curious how you would frame the impact of prior pull forward activity on billings growth and revenue growth this quarter?

James Beer -- Chief Financial Officer

Yeah. This quarter, you're quite right, when you look at the sequence of deferred revenue, we did see a different pattern emerging and this is very much driven by what we talked about last quarter, where in Q2 we saw relatively robust deferred revenue as various customers stepped in front of the price increases that we had announced in the middle part of September last year and that drove an unusual level of activity in Q2. And so, of course, that activity was drawing from quarters such as Q3 and the fact we think that we will also draw some activity from quarters into the future as well. So, it's very much driven by that moving forward of activity into Q2, driven by customers reacting to price increases that were about to come into play.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Okay. Thank you, James. And then just to clarify, are you seeing or have you seen any underlying changes to demand for any of your products or across any of your Jiras?

James Beer -- Chief Financial Officer

Well, we've been pleased by the underlying strength. If you look at the subscription line, for example, it reflects nice ongoing strength year-over-year, particularly right across our cloud products and, of course, the data center business has accounted for within that line as well and that continues to grow as well.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Okay. And then just one last quick one, if I may. Given that you closed the Opsgenie acquisition about six months ago and significantly lowered the price points almost immediately after, I'm just curious to get your thoughts on what you've seen around demand elasticity for that product so far? Thank you.

Scott Farquhar -- Co-Founder and Chief Executive Officer

It's Scott here. I'll talk about that. Well, Gregg, yes, eventually we closed Opsgenie, that's in a space we're excited about the natural adjacency to the products that we have today. And we've had a history of pricing our products aggressively to make sure we capture that market share out there and we've done that from the various with Jira and Confluence, and we've done that with other products since, you continue to see us do that, we think it's a very nice end market and at this stage we're off to capturing market share versus maximizing any individual customer. We know that happens a lot wider as you get a larger customer base.

Gregg Moskowitz -- Mizuho Securities -- Analyst

Okay. Terrific. Thanks very much.

Operator

The next question comes from Nikolay Beliov with Bank of America. Please go ahead.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking my questions. Hey, gents, just to follow-up on your comment about the draw forward from 3Q and forward quarters. I would imagine the draw forward from quarters after 3Q will be significant less than the impact in 3Q, correct?

James Beer -- Chief Financial Officer

Well, I would expect it to be a lower impact as each quarter goes by. Recall when we were doing the call 90 days ago, we noted the pull-forward activity included some multi-year renewal activity. In fact, you saw that quite clearly in the sequential trend of long-term deferred revenue. So there will be a tail to this feature, but I would expect that as each quarter goes by it, it naturally diminishes somewhat.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Got it. And you will know the pricing of the Premium additions, Jira Software is 2x higher than the current additions more or less (technical difficulty) Confluence. Can you describe the genesis of Premium and what do you think the addressable audience you've got before that as proportion of the business?

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

Hi, Nikolay. Yeah, sure. It's Mike here, I can to that. Look, as our cloud offering continues to grow, as we said, we now crossed the 100,000 cloud customers. We necessarily start getting more advanced customers with advanced used cases that need more specific functionality to tailor to their use case and that's really the genesis of Premium. We've always tried to be very customer labor in introducing new offerings or additions and Premium is no different as we get advanced Jira Software and Confluence customers in that 100,000 that continue to push the envelope of what they require. That's where the Premium comes from. You're right about the pricing. Obviously, we've only just opened the Early Access Program last week, so more to come about how that's going; very, very early days.

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

The next question comes from Ittai Kidron with Oppenheimer. Please go ahead.

Ittai Kidron -- Oppenheimer & Co. Inc. -- Analyst

Hi, guys. A couple of questions from me. First on the OpEx guidance, I guess the operating margin guidance for the next quarter, James, it implies a significant increase in OpEx now, maybe you can kind of dig into that, what's behind us. I'm looking -- last couple of years, the implied increase here is more than double what it was in the two previous years, so any color you can give us on that?

James Beer -- Chief Financial Officer

Yes, sure. So, again, last quarter we talked about the fact that we were going to expect to see lower operating margins in the back half of the year versus those that we recorded in the front half, and that was very much driven by our focus on building up our recruiting engine and thereby driving more new employees joining the company. In fact, that's very much what you've seen. You see that in the Q3 days, so that we've put out just now. And we've been doing that, because we very much like the opportunities that we see in front of us, particularly around cloud platform, around cloud products, the IT area in particular. We've talked about quite a bit over the last few calls and, of course, the data center area is another important area of investment for us for the coming years.

So, that's very much playing through as we expected. Now, since we were doing this call 90 days ago, of course, we've also announced the acquisition of AgileCraft. When we did that, we noted that there would be some operating margin impact. Now, we expect that to be about half a margin point in our Q4 results. Now, remember, of course, that that includes the effect of the deferred revenue haircut. So it's not reflecting the ongoing run rate of AgileCraft, because of that deferred revenue haircut, because the expenses don't get haircut, it's just the revenue side of the equation; the deferred revenue, they gets haircut. So it's really those things that are driving the operating margin story.

Ittai Kidron -- Oppenheimer & Co. Inc. -- Analyst

Very good. Very helpful. Just follow-up on this. In '16, in your fiscal -- in your fourth fiscal quarter of '16 and '17, you had a similar impact where your margins dropped in the fourth quarter, but you have rebounded fairly quickly within one or two quarter, you're pretty much back to your historical levels, should we think about the same pattern this time around, or you think this investment cycle will be a little bit more sustained this time around?

James Beer -- Chief Financial Officer

Well, I would just say, obviously, we'll do our annual guide on the next of these calls. I'd just say that we continue to see a lot of margin leverage in the model over time. I told last week when we were in Los Vegas about us continuing to plan for modest levels of margin increases over time.

Ittai Kidron -- Oppenheimer & Co. Inc. -- Analyst

Got it. Very good. Good luck, guys.

James Beer -- Chief Financial Officer

Yeah, thanks.

Operator

The next question comes from Bhavan Suri with William Blair. Please go ahead.

Bhavan Suri -- William Blair & Company -- Analyst

Hey, guys. Thanks for taking for my question. I guess I just wanted to touch sort of strategically on the approach you have with Opsgenie and Align. As you think about them, their higher price and typically the strategy has been lowest price best products. When you think about the low touch go-to-market motion, I guess as you think about the higher priced products do they need more hands on selling and so you think about sort of the investment in enterprise advocates. Is that part of what's going on here or do you think these are products that you can get away with selling barely despite the higher price point. I'm just trying to understand how that go-to-market motion works for something that's competitively priced versus things like Jira, which is still sort of substantially lower priced to competitors?

Scott Farquhar -- Co-Founder and Chief Executive Officer

Yeah. It's Scott. I had the third part in terms of the strategic side and Jay can talk more about the go-to-market motion. Firstly, again, Opsgenie, we don't think is a high-priced product. We think it's a -- compared to its peers. It's very competitively priced. If you look at -- in, sort of, where we -- the price like Jira is becoming the standard really for work across all the new development teams and software and increasingly across all enterprises, and when you have that you then will get what other problems the customers have around this and how do you fulfill them.

In -- it's the Jira line, that's the case that people are trying to double with digital transformation, at wide scale and like have 1,000 people, 10,000 people. Jira is my standard for work, but I need a way of making sure that that work is tied up to the strategic objectives of the company. And so that's where Jira Align comes. And Opsgenie is, you find developers and ops people these days are on call, because they have how to deliver cloud products and always on products and so increasingly on call. And then separatedly, we look at what is the market for them and what is the customer base. In many cases, Jira Align, it will be targeted at the larger customer base, every -- not every one of our 170,000 (ph) customers will want Jira Align, it's only the very large customers, and so you price according to kind of the market size there. We don't have a significant change to go-to-market there. I will let Jay talk more specifically to that.

Jay Simons -- President

The only thing I would add is I think with Opsgenie we land as efficiently as we do with all of the other products in the portfolio and then the price point gives us kind of expansion leverage over time. The one thing that Scott didn't mention is that channel is really important leverage point for its sales. And so we have 550 solution partners around the world, typically not focused on landing necessarily, but where we have landed and there is expansion opportunity either with something like Opsgenie or the rest of the portfolio or with something like AgileCraft, it's a natural expansion point from an established existing Jira Software customer at scale. The channel is basically our sales strategy largely.

Bhavan Suri -- William Blair & Company -- Analyst

Sure. Jay, thanks. I guess a quick follow-up on the channel. So if you think about it, you look at guys like C1, Prism, some of your larger platinum partners and you think about what they were selling or bringing to the table with Jira at your JIRA Service Desk, et cetera and now, sort of, you think about the greater focus with IT, I guess, how does that impact the channel partners, and sort of what's been the initial feedback from them? Are they excited about, sort of, Opsgenie and the various pieces of it versus IT or is that a new sort of channel you sort of cultivate as you go into that given few quarters into that focus on IT.

Jay Simons -- President

Yeah. I mean, I'm super excited. Remember that IT has been our primary selling point for even something like Jira Software and the Fortune 500,000 IT is sort of the port of call that the channel is engaging with to expand the usage of Jira Software across the business. They're super excited about things like Opsgenie and JIRA Service Desk and AgileCraft, I mean, our Jira line, all the things that we are basically adding to the portfolio, I think, are really needy for them and where they already placed to help customers expand the usage of the Atlassian.

Bhavan Suri -- William Blair & Company -- Analyst

Great. Thanks for the color, guys.

Operator

The next question comes from Heather Bellini with Goldman Sachs. Please go ahead.

Heather Bellini -- Goldman Sachs Group -- Analyst

Yeah. Thank you. I was wondering if we could go back to the commentary about the pull-forward from last quarter. So I mean I know you guys don't guide to deferred and obviously we're all kind of trying to guess where you are going to come in at, but there was about $10 million of upside last quarter and you guys kind of mentioned, if you normalize for that, that's what the true number was ex the pull-forward. And I guess you were talking about on the long-term deferred side there, but like this quarter, short-term deferred was impacted by $10 million versus where consensus is. I'm trying to get a sense for your comments, James, about how it's going to continue to get impacted, because aren't you having contracts that are renewing in period now, that are at the higher price points. So that should be offsetting the amount of the pull-forward from what's over a quarter ago now. I'm just trying to think through that impact and the offset of (multiple speakers) prices.

James Beer -- Chief Financial Officer

Yeah, that's right, Heather. I mean, we are obviously now starting to see the impact of the higher prices rolling through on the service side and in the areas of the cloud business where we raise prices. So, yes, there is a variety of layers to this, if you well. And just going back to something I started off the call in Q2 commenting , this is in part why we're very much focused on revenue as our primary top line metric. We told in Las Vegas about very high recurring revenue percentage of our total revenue in the mid-80s percent and then also the fact that predominantly our businesses is sold either in a one-year manner or on the cloud side, now over 75% on a monthly basis. So we very much look at revenue as the way to really assess our business over the long-term in terms of customer leases activity. And, yes, there will be some effect from deferred revenue out into the future, but that will subside as each quarter goes by.

Heather Bellini -- Goldman Sachs Group -- Analyst

So is there any clarity you can help give us just so we can try and minimize kind of -- or I guess help us think about the sequential impact on deferred revenue for the June quarter, kind of, parsing your comments that there still going to be a slight headwind. I mean, I don't think any of us want to try and set a high bar for you guys, but it's kind of hard without any more clarity than spend just some of the free things that you're using and I'm also looking at the fact that you guys also have a relatively -- if you look at your billings comp next quarter, I think that's harder. (multiple speakers)

James Beer -- Chief Financial Officer

Heather, I would just get back to that. Obviously we've guided revenue and then on the deferred revenue side, I think, if you look at both the sequential trend last year and then this year for both short-term and long-term deferred revenue, you can see the additional pull-forward activity that happened in fiscal '19 versus in fiscal '18. And so, I think, while there are a variety of these overlapping type issues that drive the end result, I think that gives you some sense as to how things will play out.

Heather Bellini -- Goldman Sachs Group -- Analyst

So just to be clear, if we look at -- last year, in Q4, you had a 10% sequential growth rate on your short-term deferred and 7% for long-term, you've been running below the seasonality that you posted last year, you're saying we should assume that you continue to run below your seasonality in Q4. And does that normalize then in fiscal '20, should we think about it that way?

James Beer -- Chief Financial Officer

Well, I just try one last comment on this. I would describe the pull-forward activity that occurred in this fiscal year as greater than that occurred in the previous fiscal year. And so, again, you can get us pretty reasonable sense for that by looking at the sequential trend in deferred revenue.

Heather Bellini -- Goldman Sachs Group -- Analyst

Okay.

James Beer -- Chief Financial Officer

So I think I'll just leave it at that.

Heather Bellini -- Goldman Sachs Group -- Analyst

Okay. Thank you.

Operator

Your next question comes from Michael Turits with Raymond James. Please go ahead.

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Hey, guys. I think this comes back to Bhavan's question a bit. When you talked about the increased pace of hiring, how much of that is also an increased pace on the sales side? You talked about having 25 enterprise advocates at this point, you get 19 a little over a year and a half ago for whatever reason whether because of more complex sales, more sales up toward IT and top management, is that driving an acceleration in sales headcount growth as well?

Jay Simons -- President

Hey, Michael, it's Jay. No, not materially. I mean it's nominal hiring in the enterprise advocate group. There's other hiring that we do in the -- in our field operations group to support the channel, which is where we get most of our sales leverage.

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Okay. And then just one quick one for James. You talked about that increase in duration last quarter, logical ahead -- as part of the pull forward dynamic. Is there any of that still going on that survived past the pull forward that was primarily last quarter, prior quarter?

James Beer -- Chief Financial Officer

Yeah, the pull forward occurred in Q2, not in Q3.

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Right. In other words, as the duration go back down again from your perspective and so is associated with the pull-forward (multiple speakers) was there anything remaining there?

James Beer -- Chief Financial Officer

Yeah. And we very much reverted to normal costs activity now with that pull-forward activity of Q2 is behind.

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Okay. Thanks very much, guys.

Operator

The next question comes from Derrick Wood with Cowen. Please go ahead.

Derrick Wood -- Cowen and Company -- Analyst

All right. Great. Thanks. I had a question on the geographic growth. It looks like sequential growth in EMEA, and APAC was lower than Americas, which -- the Americas are quite strong, but EMEA did -- and they had a bigger quarter in December, maybe there's more pull-forward effects there. But could you speak to some of the dynamics going on there internationally and why maybe that EMEA numbers stand more volatile and Americas has been similar?

James Beer -- Chief Financial Officer

Yeah, the EMEA growth rates, I think, you can track very much along to this pull-forward point that we've been discussing, because it was -- there that we have about half of our channel partners and those channel partners were very organized, anticipating the price increase announcements that came in September of 2018. And so they were an important part of how that whole pull-forward dynamic played out. Therefore, the EMEA growth rate in Q2 is very strong and you're seeing a smaller growth rate in Q3, because of that activity being pull-forward.

Derrick Wood -- Cowen and Company -- Analyst

Okay. And in the shareholder letter, you talked about half of the attendees in Summit were from IT and I'm just curious, would you say that that's been driven by the Opsgenie acquisition or just more increase in interest and core products like Jira Ops, JIRA Service Desk? And then, I guess, as a follow-up, when you do land in IT or do you see any difference in deal sizes versus landing in developer products? Thanks.

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

Yes. It's Mike, I can take that. Look, it's -- I wouldn't say it's driven by the Opsgenie acquisition, although obviously that helps accelerate things. Landing in IT is something we've been doing for 10,15 years depending on where the software team is and as we continue to broaden out, Service Desk is probably what four or five years old now. Confluence has landed very solidly in IT teams for well over a decade. So it's just continued momentum behind that. We are increasingly seen as a partner to IT at an uber brand level, at the Atlassian level in the ways that we help IT in lots of different scenarios, whether that be managing the documentation needs in Confluence across to all of the SM needs and services can help them with and obviously then including DevOps and their continued movements there with Opsgenie and other things, and obviously Jira Software and Jira Core being pretty key pieces of how IT can run all sorts of processes. So, I'd say it's just a continued rise, there's no massive change in that focus with Opsgenie.

Derrick Wood -- Cowen and Company -- Analyst

Okay. Any comment on deal sizes, difference with landing with IT versus a software developer led deal?

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

No comment on deal size, it's being materially different.

Derrick Wood -- Cowen and Company -- Analyst

Okay. Thank you.

Operator

The next question comes from Keith Bachman with Bank of Montreal. Please go ahead.

Keith Bachman -- The Bank of Montreal (BMO Capital Markets) -- Analyst

Hi. Thank you very much. I had one question, then a clarification, if I could. And the question relates to the cloud Premium available for Jira Software and Confluence. Assuming that this -- that the Premium notion gets spread into other categories, does this you think lessen the impact of price changes and what I mean by that is really, A, Atlassian's benefited from price increases, I think, over the past years; in other words, it's been an inelastic pricing curve. And does it, B, perhaps, lessen the impact of the pull-forwards and whatnot that you experienced last quarter and the reverse of that? So I'm just trying to understand, philosophically, the notion of increasing the Premium SKUs, if you will? Do you think it creates less upside in aggregate to the revenue line item and/or impact to what we characterize the seasonality surrounding the price increases? And I have a quick follow-up.

Jay Simons -- President

Yeah. Thanks, Keith. Look, it's worth noting we already have the Bitbucket Premium and have had for, I believe, a year or more on the Bitbucket side of things and obviously Trello and Opsgenie both have addition based pricing. So in a way Jira Software and Confluence, they are just coming into line with other things we already have and obviously have to learned from and understand how those additions pricing works in the cloud. Philosophically, it's no different than our long history of, I guess, price optimization. Again, I'd say, philosophically, we always like to deliver usage for full value. We'd like to make sure the customers use the product first and then purchases it second, and that's no different with the Premium additions and no different with the cloud. We obviously know a lot more about the customer base in the cloud, and so it can be more precise with our pricing and pricing movements, I suppose.

And, at the same time, you've seen us as we talked about at the Analyst Day last week reducing a lot of prices at the same time, for example Opsgenie and JIRA Service Desk, where we believe the market size is still significantly larger than where we are and we have a much larger opportunity in perhaps how competitors view the market size. So, we just continue to be thoughtful about pricing.

Keith Bachman -- The Bank of Montreal (BMO Capital Markets) -- Analyst

Okay. Fair enough. Thank you. My quick follow-up is on Align. Obviously, last week there seem to be a lot of interest in Align from your customers and partners and even investors, I was just wondering if you could give us any directional barometers about how we should think -- be thinking about the revenue impact? You've done that before with Trello and I understand there's a lot of deferred write-off, but it's just hard to understand how we should think about the impact, even if we just look at the next fiscal year. Is there any categorization or growth rates or dollar potential ranges of impact that you could give us to help us tune our models a bit?

James Beer -- Chief Financial Officer

Well, we've noted that for the current quarter, Q4, we'd expect about $1 million to $2 million of revenue from AgileCraft and that's of course after the effects of the deferred revenue haircut and that haircut effect stays in place for three to four quarters directionally. So, obviously, we are excited about the market there. We feel as though it has a lot of potential for us to continue to build out our impact, particularly larger organizations, but we're not offering a particular steer on the AgileCraft of Jira line revenue for fiscal '20.

Keith Bachman -- The Bank of Montreal (BMO Capital Markets) -- Analyst

Okay. All right. Thank you.

Operator

The next question comes from John DiFucci with Jefferies. Please go ahead.

John DiFucci -- Jefferies -- Analyst

Thank you. I believe most of my question has been asked, but just a quick follow-up to that. I guess, James, you said that AgileCraft is going to be dilutive to margins by 50 basis points this year, and I think you said that for fiscal '20 that -- it was also going to have a diluted impact. I mean, could you give us any help with that, like it will be more dilutive or less dilutive than the 50 basis points. I mean it really dependable how much investment you're going to do over time, I realize that, but just...

James Beer -- Chief Financial Officer

John, yeah, as you pointed out, we noted when we announced AgileCraft that we would see non-IFRS operating margin dilution in fiscal '20. Now, obviously, again, that deferred revenue impact starts to trail away once you get into the back half of fiscal '20. So if you look in contrast to that with the operating margin, non-IFRS operating margin impact that it has on Q4 of this year, I would certainly be expecting that headwind to subside as the quarters of fiscal '20 go by.

John DiFucci -- Jefferies -- Analyst

Okay. That's very clear. Thank you very much.

James Beer -- Chief Financial Officer

Okay.

Operator

The next question comes from Keith Weiss with Morgan Stanley. Please go ahead.

Keith Weiss -- Morgan Stanley -- Analyst

Thanks a lot. Thank you guys for taking question. I think most of my questions have been asked, but I guess on the theme of, sort of, acquisitions. On -- for Opsgenie, it's been sort of six months on board already, any kind of indication you can give us on how it's been tracking versus your expectations? And I'm assuming you are not going to give us a sort of a revenue number, what the contribution or what the user number of the contribution is, but any sense you could give us on how that's started to sort of ramp up in terms of contribution into the results.

Scott Farquhar -- Co-Founder and Chief Executive Officer

Keith, Scott here, I'll take that one. (technical difficulty) as you pointed out, we're pretty proud. We just -- at the summer, we launched the integration with the management, so that allows us to pull users from our products into -- from one product to the other seamlessly. We just announced that we've unified the UI, so that makes a lot easier for our users to move from one to the other and sort of maintain their mental context of where they are. So those things only happened last week. But we did -- as has been with the Atlassian brand -- ahead of those things, the Atlassian brands, the pricing changes and other things we've done inside Opsgenie have materially improved the run rate as a stand-alone company and we're really happy with how that is playing out and we expected to further improve as we bring them into the product set.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. And then maybe one follow-up for James. Understanding that M&A is a big part of, sort of, the operating margin pressure that you guys see in the fourth quarter, but like you said you have stepped up hiring a lot. Can you give us any kind of visibility or any kind of granularity into what are some of the core areas of hiring? What are the core areas of investment you guys have -- heading into core that's taken place in Q3 and into Q4?

James Beer -- Chief Financial Officer

Yeah. The focus around our hiring is largely on the R&D side. It talks about our focused investments in the cloud platform and our cloud products in particular and the office that is growing the fastest is the Bengaluru office. And so, really that's the primary focus -- is the R&D area.

Keith Weiss -- Morgan Stanley -- Analyst

Got it. That's super helpful. Thank you so much.

Operator

The next question comes from Gray Powell with Deutsche Bank. Please go ahead.

Gray Powell -- Deutsche Bank -- Analyst

Great. Thanks for taking the question. Maybe on the product side, at the Analyst Day you flagged 7,500 server customers that have over 500 users that could be candidates for the data center offering. I'm just curious, what's the normal catalysts for the customer to upgrade? And how fast do you think you could convert those customers?

Jay Simons -- President

Yeah. Hey, Gray, this is Jay. So the 7,500 were our server customers that had at least one product with over 500 users of server. And so, it didn't include the cloud population. And what we clarified in that slide is, that is the population that continues to grow by the way that we can upgrade to data center and try to upgrade the data center. That is also the same population that will potentially move over to the cloud and cloud Premium that we announced at Summit. And so there's two kind of upgrade paths from just the standard server that they're using.

The upgrade path to data center from server tends to be the message around data center, there's a bunch of features that are built to support large mission critical scale to scale the usage of the products. And so better performance, better reliability and architecture that allows the proxy to be deployed in a high availability fault-tolerant way and then additional capabilities for administrators to do upgrades without bringing the system down. And so, if you're supporting 500 employees that use it every day of -- in every minute of every day, those kinds of capabilities are worth upgrading for. And the naturally the upgrade to cloud, you get a bunch of those things provided as part of the cloud service.

Gray Powell -- Deutsche Bank -- Analyst

Got it. Okay. Thank you very much.

Operator

The next question comes from Rishi Jaluria with D.A. Davidson. Please go ahead.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Hey, guys. Thanks for taking my questions. Mostly it's going to be follow-ups on earlier questions. First, James, wanted to clarify your earlier comments on the OpEx and operating margin side. It sounds like excluding AgileCraft, your margin guidance and OpEx guidance for the year would have been consistent with what you've guided on the previous earnings call. Is that a fair statement?

James Beer -- Chief Financial Officer

That is correct.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Okay, thanks. That's helpful. And then, on the EMEA side, I know we talked about the channel partners and some pulling forward of deals, were there any other factors for why EMEA was flat or even slightly down sequentially. Were there any macro factors, was there FX that drove that?

James Beer -- Chief Financial Officer

No, nothing material.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Okay, thanks. And then now turning to the cloud Premiums SKU, just wanted to kind of go into what the addressable portion of the customer base looks like. So if there's round numbers of 100,000 cloud customers, what proportion of those are addressable for a conversion from cloud to cloud Premium SKU?

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

Yeah. Obviously, we -- it's Mike here, sorry, Rishi, look obviously bullish about cloud Premium and its prospects. We -- I'm not disclosing what we think the proportion would be at the moment, but also it's a bit of a learning exercise for us. Obviously, we believe that strong customer demand base for the offering among those advanced teams. It's worth noting that Premium is not necessarily about large customers as much as advanced users, advanced team. So you can be a 50 user cloud customer in need of these capabilities and you can be a 500 user cloud customer and not use these capabilities, because your usage of the product is not at that advanced level yet, so we have to learn those levels a little bit ourselves, but obviously we've done a lot of research to release these, a lot of customer testing and we are bullish about the prospects for both.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Got it. Thanks. And then last one for me, and I'll jump out. But going back to AgileCraft and kind of the margin impact, I guess, mainly -- I understand there is accounting treatment with deferred revenue writedown, should there be a similar impact on the cash flow margin front as we are seeing on the non-IFRS operating margin front and I think more importantly, would that same kind of dynamic play out next year? Thanks.

James Beer -- Chief Financial Officer

Well, you would obviously get a different dynamic around the cash flow margin as opposed to the accounting margin. The accounting margin is significantly impacted by this deferred revenue haircut that we've been talking about. It's early, obviously, in the growth of AgileCraft and we have very robust margins at Atlassian. So the focus here, I think, is on the market opportunity, the scale of it and I'll just note how in Q4 here we're guiding to an increased free cash flow amounts. So we've moved that guide up by $15 million at both the north and south end of the range.

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Got it. Thank you so much.

Operator

Your next question comes from Pat Walravens with JMP Securities. Please go ahead.

Patrick Walravens -- JMP Securities -- Analyst

Great. Thank you. I guess, I have two questions related to the acquisitions. The first one is, when you acquire a company like AgileCraft or Opsgenie that had traditional salespeople, what you do with them in the integrations going forward? Do they remain in that role or do you transition into something else?

Jay Simons -- President

Hey, Pat, it's Jay. So in both cases, they had relatively small sales teams. And in Opsgenie's case, the sales function worked very similar to the enterprise advocate function, where we're landing with Opsgenie, with the efficiency that is very similar to Atlassian and then we have direct teams and our channel that can focus on expanding that customer up through Premium in more and more valuable versions of both the customer and to us -- of the product that they've chosen. AgileCraft is a little different, where they have a small sales team, they focus on larger accounts and the way that will scale the sales coverage is again through the channel. And so most of the channel is already implanted in our largest customers, because they've supported the expansion of Jira Software, which is kind of the bedrock data source that feeds into Jira Align, AgileCraft once customers take that and that's basically where we're going to get a lot of leverage in continuing to grow and expanding their business.

Patrick Walravens -- JMP Securities -- Analyst

All right. That's great. Thanks, Jay. And so I think the follow-up will be for you too. So as we were walking around and talking to the solutions consultants and people at the conference, there was a lot of excitement about Opsgenie in particular, but when you drill down on it, I would say that the knowledge base isn't there yet for a lot of those solutions consultants, how you educate them?

Jay Simons -- President

How do we educate the partners?

Patrick Walravens -- JMP Securities -- Analyst

Yeah, your partners about Opsgenie.

Jay Simons -- President

Yeah. So we have an enablement organization that basically focused on equipping the channel with education on what the products do and material to help themselves and we co-market with them through development fund, that's sort of ongoing. We have twice a year, relatively large channel kickoffs, channel field events both in Europe and in the US, it kind of galvanize the channel around the biggest opportunities for us and for them.

Patrick Walravens -- JMP Securities -- Analyst

And do you feel like you're there or does that take awhile?

Jay Simons -- President

I mean, it's ongoing. It's ongoing. I mean, we -- Summit is also a big activation point for a lot of the channel, because most of our largest and most active channel partners are there in the Expo Hall, you're probably talked to a bunch of them. And so we actually had Partner Day that preceded Summit, which is a big rallying point for all those things that we want them to focus on over the next six months.

Patrick Walravens -- JMP Securities -- Analyst

All right. Great. Thanks very much.

Operator

(Operator Instructions) The next question comes from Jonathan Kees with Summit Insights Group. Please go ahead.

Jonathan Kees -- Summit Insights Group -- Analyst

Great. Thanks for taking my questions. I just wanted to ask about the segmentation for the products, specifically the marketplace. It grew 36% in the quarter and I guess that's part of the trend. I've been noticing in my model here that it's been decelerating and this is the first quarter in which it's actually growing not as fast as the company average. I'm kind of surprised, because at Summit there was lot of apps there that were in display, as well as a couple of quarters ago you announced a lot of apps that are going to be made available for the data center. So just trying to understand there in terms of -- this is part of just an overall trend or is there just less promotion going on or what's going on with that?

James Beer -- Chief Financial Officer

We continue to be very pleased with the marketplace, it's an important part of our overall ecosystem and remember that again in Q2 we talked about the fact that there was some pull-forward activity around marketplace, so other revenue, because when we take our portion of an app vendors' sale that drops immediately into the other revenue line, because we don't have any ongoing obligation to deliver. So you have that immediate revenue recognition. So that was another illustration of this pull-forward topic that we've been talking about on this call.

Jonathan Kees -- Summit Insights Group -- Analyst

Okay. All right. So it -- in terms of the growth rate, it sounds like you're sort of -- are pleased with it and just it will be up and down, especially around where there's pull-throughs for pricing increases?

James Beer -- Chief Financial Officer

I think that's a reasonable way to think about it, yeah.

Jonathan Kees -- Summit Insights Group -- Analyst

Okay. All right. Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mike Cannon-Brookes for any closing remarks.

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

Thanks, everyone. Thanks very much for joining our call today. We truly appreciate your time and look forward to keeping you updated on our progress going forward. Have a great day.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 48 minutes

Call participants:

Ian Lee -- Head of Investor Relations

Scott Farquhar -- Co-Founder and Chief Executive Officer

Gregg Moskowitz -- Mizuho Securities -- Analyst

James Beer -- Chief Financial Officer

Nikolay Beliov -- Bank of America Merrill Lynch -- Analyst

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

Ittai Kidron -- Oppenheimer & Co. Inc. -- Analyst

Bhavan Suri -- William Blair & Company -- Analyst

Jay Simons -- President

Heather Bellini -- Goldman Sachs Group -- Analyst

Michael Turits -- Raymond James & Associates, Inc. -- Analyst

Derrick Wood -- Cowen and Company -- Analyst

Keith Bachman -- The Bank of Montreal (BMO Capital Markets) -- Analyst

John DiFucci -- Jefferies -- Analyst

Keith Weiss -- Morgan Stanley -- Analyst

Gray Powell -- Deutsche Bank -- Analyst

Rishi Jaluria -- D.A. Davidson & Co. -- Analyst

Patrick Walravens -- JMP Securities -- Analyst

Jonathan Kees -- Summit Insights Group -- Analyst

More TEAM analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

More From The Motley Fool

Motley Fool Transcribers has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Atlassian. The Motley Fool has a disclosure policy .