Confluent, Inc. (CFLT Q4 FY2023 earnings call

• Closed fiscal year 2023 with solid Q4, total revenue grew 26% to $213 million; Confluent Cloud revenue reached $100 million for the first time, growing 46%; non-GAAP operating margin was 5.3%, first positive quarter. • Accelerated transition to a fully consumption-oriented go-to-market model for Confluent Cloud, including new compensation model and system rollout. • Data streaming recognized as a category with Confluent being a leader, and stream processing as a growth opportunity. • Partnerships with Anthropic, Pinecone, and OpenAI for generative AI applications. • Flink offering as a key growth area with technological superiority and integration with Kafka.

In fiscal year 2023, total revenue grew 33% to $777 million. Confluent Cloud revenue grew 65% to $348.8 million. For Q4 2023, total revenue grew 26% to $213.2 million. Subscription revenue grew 31% to $202.8 million. Confluent Platform revenue in Q4 grew 18% to $102.8 million, representing 48% of total revenue. Confluent Cloud revenue in Q4 grew 46% to $100 million, ending the quarter at 47% of total revenue.

• For Q1 2024, total revenue expected to be $211 million to $212 million (21%-22% growth); subscription revenue $199 million to $200 million (24%-25% growth); non-GAAP operating margin approximately negative 4%; non-GAAP net income per diluted share 0 to $0.02. • For full year 2024, total revenue expected ~$950 million (22% growth); non-GAAP operating margin to breakeven; non-GAAP net income per diluted share ~$0.17. • Confluent Cloud revenue in Q1 expected ~$105 million (43% growth); free cash flow margin to breakeven in fiscal year 2024.

• Execution risk of the consumption transformation; need to fully adapt and optimize the business. • Macro environment uncertainties affecting customer spending; although some green shoots seen in digital native segment. • Complexity in technology and go-to-market changes potentially impacting sales and adoption.

Q: Michael Turrin asked about commonality in needs for data streaming among partnerships like Anthropic, Pinecone, and OpenAI.

A: Jay Kreps said streaming is critical for generative AI applications, bringing together proprietary enterprise data and generic language models, and partnerships support the architecture.

Q: Sanjit Singh asked about customer innovation initiatives and pipeline.

A: Jay Kreps said there are green shoots in the digital native space with more activity after optimization, though not back to 2021 levels.

Q: Brad Zelnick asked about TAM for data streaming and Flink's importance.

A: Jay Kreps said about a third of workloads are in real-time, third in analytics, third in stream processing; Flink is a generalization of batch systems, key for workload movement.

Q: Mike Cikos asked about sales comp model shift and Flink impact.

A: Rohan Sivaram confirmed the 200-300 basis point operating margin headwind from commission recognition is incorporated in guidance; Jay Kreps explained Flink's interface is simple with SQL and common programming languages.

Q: Jason Ader asked about organizational changes in sales.

A: Jay Kreps said there are tweaks to field operations aligning with consumption, with continuity in the team.

Q: Kash Rangan asked about customer feedback on consumption model and technology complexity.

A: Jay Kreps said customer interaction not immediately changed; technology interface is simple, with cloud services reducing operational complexity.

Q: Pinjalim Bora asked about sales enablement and go-to-market changes.

A: Jay Kreps said compensation and tracking systems changed, with enablement focused on driving the new model successfully.

Q: Gregg Moskowitz asked about gross margins and efficiency.

A: Rohan Sivaram said gross margins are strong due to cloud mix and engineering efficiency, with potential for higher multitenant mix.

Q: Derrick Wood asked about open source conversion and cloud revenue outperformance.

A: Jay Kreps talked about consumption transformation and making product easy to switch; Rohan Sivaram said Q1 cloud revenue growth and green shoots in digital native segment.