Confluent, Inc. Q2 FY2025 earnings call

• Confluent delivered solid second quarter results with 21% subscription revenue growth, 28% Confluent Cloud revenue growth, and non-GAAP operating margin of 6%. • DSP monetization is gaining traction with Flink ARR growing 3x over 2 quarters. • Cloud business had larger customers optimizing and adopting new use cases at a measured pace, but RPO grew 31% due to larger multiyear deals. • Operational enhancements include improving coverage ratios between AEs, SEs, and post-sales roles, and accelerating the build-out of the DSP specialist team. • Displacing CSP streaming offerings with win rates above 90%, with WarpStream showing incremental growth and cost savings for customers. • Strong partner ecosystem with over 20% of business partner-sourced, and partnerships with leading companies like Infosys. • Flink ARR approaching $10 million, with strong contributions from both Confluent Cloud and Platform. • AI workloads in production growing 10x across a few hundred customers, with examples like Notion using Confluent for AI-driven features.

In the second quarter, subscription revenue grew 21% to $270.8 million, which was 96% of total revenue. Confluent Platform revenue increased 12% to $120.3 million. Confluent Cloud revenue saw a 28% growth to $150.5 million, representing 56% of subscription revenue. Flink ARR grew approximately 3x over the past 2 quarters. RPO growth accelerated to 31% in the quarter, reflecting deeper customer relationships.

• Fiscal third quarter 2025: Subscription revenue expected $281 million to $282 million, +17% growth; non-GAAP operating margin ~7%; non-GAAP net income per diluted share $0.09 to $0.10. • Fiscal year 2025: Raised low end of subscription revenue guidance by $5 million to $1.105 billion to $1.11 billion, +20% growth; non-GAAP operating margin ~6%; adjusted free cash flow margin ~6%; cloud as a percentage of subscription revenue expected 56% in Q3 and 55% in Q4.

• Consumption headwinds due to larger customers optimizing and slower adoption of new use cases. • Impact of an AI-native customer reducing Confluent Cloud usage, dampening Q4 cloud revenue growth. • Uncertainties in achieving growth targets despite investments in sales and product enhancements.

Q: Matt Hedberg asked about consumption optimization trends and if they were macro or company-specific, and how prevalent they were.

A: Edward Kreps responded that it's a similar dynamic to other companies, with customers optimizing and taking time to get value, and an AI-native customer moving to different internal operations affecting Q4 cloud spend.

Q: Brad Zelnick asked about sales coverage ratios and DSP specialist team and their impact.

A: Edward Kreps explained that improvements in coverage ratios and DSP specialist team are showing early results in late-stage pipeline progression, with over 40% sequential increase in Q2.

Q: Rohan Sivaram was asked about guidance and NRR.

A: Rohan Sivaram discussed that cloud month-over-month growth rates are expected to be notably below prior years, but RPO growth and green shoots like Flink momentum and late-stage pipeline progression are positive.

Q: Sanjit Singh asked about Flink and sales comp.

A: Edward Kreps said Flink growth has been steady, with cloud being serverless and CP having larger customer deployments, both contributing to growth.

Q: Peter Weed asked about customer segments and GRR.

A: Edward Kreps noted focus on $20k-plus to $100k-plus customers and that GRR was marginally below 90%, but CSP takeout opportunities are a focus.

Q: Jason Ader asked about sales comp and AI.

A: Edward Kreps said positive tailwinds include DSP offerings, Flink growth, and RPO commitments, despite near-term headwinds.

Q: Gregg Moskowitz asked about former company's Kafka move and Confluent Cloud challenges.

A: Edward Kreps said LinkedIn's move was internal and not a threat, and Confluent's position vs CSPs has strengthened with new offerings.

Q: James Derrick Wood asked about sales realignment and net new customers.

A: Edward Kreps and Rohan Sivaram discussed focus on customer targeting, CSP takeouts, and progress in top-of-funnel to $1 million customers.

Q: William Miller Jump asked about AI on platform and DSP traction.

A: Edward Kreps said AI opportunity is across platform and cloud, and DSP traction is promising but cloud deceleration is due to optimization and new workloads.

Q: Michael Joseph Cikos asked about CSP displacements and cloud consumption.

A: Edward Kreps said CSP displacements have high win rates and are not longer sales cycles, and Rohan Sivaram discussed cloud consumption trends and green shoots.

Q: Raimo Lenschow asked about cloud drivers and optimization.

A: Rohan Sivaram said primary driver is month-over-month growth rates, and Edward Kreps explained optimization as customer resource efficiency and contractual commitments.

Q: Rudy Kessinger asked about GRR and core streaming growth.

A: Rohan Sivaram said GRR was marginally below 90%, and Edward Kreps noted DSP outgrowing core streaming, with streaming growth affected by optimization.