Confluent Q4'22 earnings call highlights 📝

This article summarizes key highlights of the Q4'22 earnings call from Confluent. You can read the full report here.

In summary

• Edward Kreps reported that Confluent achieved its goals of driving high revenue growth and improving annual operating margin, with total revenue growing 51% to $585.9 million and Confluent Cloud revenue increasing 124%.

• Q4 FY 2022 results exceeded the guidance on all metrics; total Q4 FY 2022 revenues grew 41% to $168.7 million; subscription revenues grew 44%; cloud as a percentage of new ACV bookings was greater than 70%.

• Non-GAAP operating margin improved by 20 points in the quarter; free cash flow margin improved by 4 points.

• To adjust for macroeconomic pressure, Confluent restructured their workforce by 8%, realigned discretionary spending & reduced their real estate footprint while still maintaining 30%+ growth & investing in sales/marketing & R&D for platform differentiation/TCO advantages in market space estimated at a value of $60 billion over next few years.

• Larry Shurtz stepped down from his role as Chief Revenue Officer; Erica Schultz now manages their sales leaders. Steffan Tomlinson highlighted three factors contributing to their FY '23 revenue guidance: higher visibility, more proportionally ramped reps & robust growth in >$100K customers.

Management comments

Edward Kreps provided an update on the fourth quarter earnings call, highlighting that total revenue grew 41% to $169 million and Confluent Cloud revenue grew 102% to $68 million.

In FY 2022, Confluent achieved its goals of driving high revenue growth and improving annual operating margin, with total revenue growing 51% to $585.9 million and Confluent Cloud revenue increasing 124%.

In Q4 FY 2022, results exceeded the guidance on all metrics with RPO growing 48%, current RPO estimated at 62%, dollar-based net retention rate at 130%, gross retention rate above 90%, and 290 new customers added.

Total Q4 FY 2022 revenue grew 41% to $168.7 million; subscription revenues grew 44%; cloud as a percentage of new ACV bookings was greater than 70%.

Non-GAAP operating margin improved by 20 points in the quarter; free cash flow margin improved by 4 points; Immerock acquisition closed in Q1 but expected no material impact on financials for FY 2023.

For full year 2023 expecting 30%-31% growth ($760M-$765M), non-GAAP operating margins -15%-14%; targeting breakeven non-GAAP op margins exiting Q4 '23 & timing of breakeven FCF also roughly mirroring that timeline

The main impact of macroeconomic pressure has been elongated deal cycles with customers, but their overall win rate remains robust, and pricing is steady.

To adjust for this environment, Confluent has taken steps to restructure its workforce by 8%, realign discretionary spending and reduce its real estate footprint to accelerate time-to-profitability by one year while still maintaining approximately 30% revenue growth.

Despite restructuring efforts, investments will be made into sales & marketing as well as R&D for Confluent's platform differentiation & TCO advantages to remain competitive within the market space estimated at a value of $60 billion over the next few years.

An example was given regarding Wix's migration from open-source Kafka which resulted in a 90% ROI; additionally, investment is being made into stream processing capabilities through Apache Flink, which will be fully managed via Confluent Cloud later this year.

Larry Shurtz stepped down from his role as Chief Revenue Officer; Erica Schultz now manages theater sales leaders.

Q&A

Edward Kreps noted that the most pronounced impact of budget scrutiny was felt in the enterprise segment and across geographies.

Steffan Tomlinson highlighted three factors contributing to their FY '23 revenue guidance: higher visibility than last year, more proportionally sales reps that are fully ramped, and robust growth in $100K+ customers.

Edward Kreps stated streaming technology is an asset as production use cases are a direct part of how companies grow & operate.

He also mentioned there is an opportunity for improvement through efficiency while preserving top-line growth & innovation engine investments.

Lastly, he reassured Brad Zelnick with Deutsche Bank on Erica Schultz's leadership within Confluent’s go-to-market organization during uncertain times.

Steffan C. Tomlinson and Edward Kreps discussed the natural dynamic of consumption models across their peer group, with a strong Q4 coming in higher than expected due to mission criticality and value driving for customers.

Confluent Cloud is projected to be roughly 50% of total revenues by exiting Q4, despite the challenging environment for doing business.

Investment priorities remain unchanged from Analyst Day plans, with no major changes made on the product or go-to-market side investments.

The success of Confluent Cloud was attributed to reaching a critical threshold in terms of security scalability operations availability; plus a full commitment from the engineering team early on, as well as elevating cloud metrics of equal importance compared to software products.

Edward Kreps reported that the commercial business segment had seen continued strength, despite facing pressure from different industries.

He also noted that customers have not reverted to open-source solutions during COVID-19 due to higher operational costs associated with it.

Steffan C. Tomlinson provided insight into the Platform side of Confluent's revenue and confirmed there was no material change in contract duration but a shift towards Cloud ACV instead of Platform deals because of industry trends toward cloud services.

Jay Kreps discussed their acquisition of Immerock which adds Apache Flink capabilities beyond Kafka Streams and ksqlDB such as scalability, performance, programming language support, etc., while still maintaining support for those technologies going forward.

Steffan C. Tomlinson discussed the restructuring efforts of their company, focusing on preserving growth and improving efficiency by reducing headcount in sales and marketing, G&A, and R&D.

Edward Kreps reported that customer behavior in January was in line with expectations for the quarter so far.

He also mentioned that they are optimizing real estate footprint to improve profitability going forward; this is on top of existing plans which have already shown a 20-point improvement over 12 months from Q4 to Q4 in non-GAAP operating margin.

Edward Kreps discussed the work that needs to be done to make Flink a managed cloud service, noting it will take many years and require a reimagining of the technology.

Customers have been enthusiastic about Flink, with some asking why it took so long for its release.

Steffan C. Tomlinson noted that customers' lifetime value (LTV) relative to the cost of customer acquisition (CAC) should improve over time as more business is driven from Cloud and self-serve onboarding options are made available.

Edward Kreps explained how Confluent could expand at 130%, including making consumption models easier and frictionless, having senior connections in organizations bless new use cases, and creating strong TCO/ROI stories for customers.

Early adoption trends for Stream Designer & Governance have been positive; Stream Governance has seen unexpected levels of consumption due to balancing organizations’ need both do more with data while adhering risk restrictions associated with doing so.