Release Date: July 31, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Confluent Inc (CFLT, Financial) reported a solid second quarter, exceeding revenue and margin guidance despite a volatile macro environment.
- Subscription revenue grew 27% to $225 million, and Confluent Cloud revenue grew 40% to $117 million.
- The company achieved a positive non-GAAP operating margin, representing approximately a 10-percentage point improvement.
- Confluent Inc (CFLT) increased its total customer count by 320 in Q2, the largest sequential increase in two years.
- The company announced notable achievements and milestones across its partner ecosystem, including recognition as Partners of the Year by both Google and Microsoft.
Negative Points
- Net Revenue Retention (NRR) was 118%, below the target range of 120% to 125%, due to consumption volatility within the large digital native customer base.
- The company saw increased short-term cloud cost controls and focus on driving efficiencies in the digital native customer cohort, impacting expansion of new use cases.
- Growth of the Confluent platform business remains lumpy, driven by the timing of large renewal and expansion deals.
- The company experienced some sales leadership changes, which may impact continuity and execution in the short term.
- International revenue growth slowed compared to the US, partly due to the timing of large Confluent platform deals.
Q & A Highlights
Q: Jay, I noticed the strong customer logo adds stood out to me. Does that imply that you could see growth from this cohort as they continue to expand?
A: Yes, over time. One of our key goals in our consumption transformation was to accelerate customer acquisition, which has played out as desired. We also aimed to target high propensity accounts, and the percentage of new customer lands in this segment has increased substantially.
Q: Have you noted some of the NRR pressure? How did things trend in July after seeing some slowness in June?
A: Yes, we saw stabilization in our Tier one digital native customers entering Q2, but towards the latter half, there was a focus on cost efficiencies, which continued into July. We are taking a prudent approach to guidance for the second half of the year.
Q: Can you discuss the go-to-market transformation and how you ensure quality workloads from new customer logos?
A: We are getting into the right customers earlier in their development lifecycle, which allows us to take up the volume of customers. Ensuring growth and expansion in these accounts is on us, but we are optimistic about the potential.
Q: How are you thinking about the real-time data infrastructure and potential new service offerings?
A: We partner closely with providers of real-time database functionalities, such as Rockset. These partnerships are integral for applications in Gen-i, real-time analytics, and other key workloads, complementing our streaming platform.
Q: Can you provide additional comments on the recent sales leadership change and the adoption of Flink?
A: We had a departure in sales leadership but are not planning to immediately backfill the position. Erica Schultz remains in charge. Regarding Flink, there is significant customer excitement, with over 1,000 prospects and customers trying it out, and we are seeing nice growth in revenue from it.
Q: Rohan, you characterized digital native customers as volatile. What specific behaviors are you seeing, and how much of a risk is this going forward?
A: Digital native customers have been focusing on cost efficiencies, which has impacted expansion of new use cases. However, over a longer period, this segment has shown good growth. We have incorporated this dynamic into our second half outlook.
Q: Can you remind us of where you stand in the U.S. federal market and if there is upside in Q3 from federal?
A: We are adding to our federal sales team, which will impact next year. The public sector is a good contributor to our business, and we expect growth in this area.
Q: What parts of the DSP portfolio are seeing the strongest uptake when cross-selling to the base?
A: Connectors are the biggest business, followed by governance and Flink. We expect the attach rate from these components to increase substantially as we open them up to more customers.
Q: How does the maturity and understanding of Flink use cases compare to Kafka, and how big is the digital native segment for you?
A: Flink is about three years behind Kafka in terms of maturity. The digital native segment is sizable but not the largest vertical for us. It includes high propensity tech customers with potential for high IT spend.
Q: Can you explain the rationale behind switching Confluent Cloud pricing and its impact on revenue?
A: The pricing changes were made to reduce cost friction and align with a consumption model. This allows us to better segment the market and capture more Kafka usage. The impact on revenue has been as expected, with initial assumptions being slightly negative but leading to better expansion opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
