Q2 2022 Confluent Inc Earnings Call
Hi, everyone welcome to the comparable in Q2 2022 earnings Conference call I'm, Shane Z from Investor Relations and I'm joined by Jay Crafts, co founder and CEO and Steffan Tomlinson CFO during today's call management will make forward looking.
Statements regarding our business operations financial performance and future prospects, including statements regarding our financial outlook for the fiscal third quarter of 2022 and fiscal year 2022. These following statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.
Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-Q filed with the SEC, we assume no obligation to update these statements after today's call except as required by law as a reminder, certain financial measures used on today's call are expressed on a non-GAAP basis, we use these <unk>.
non-GAAP financial measures internally to facility analysis of our financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.
<unk> between these GAAP and non-GAAP financial measures is included in our earnings press release, and supplemental financials, which can be found on our investor Relations website at Investor stock Confluent trial with that I'll hand, the call over to Jay.
Thanks, Jane welcome everyone to our second quarter earnings call Confluent delivered another strong quarter exceeding the high end of our guidance on all metrics total revenue grew 58% year over year to $139 million confluent cloud revenue grew 139% year over year and represented 34% of total revenue in the quarter.
Confluent cloud continues to increase as an overall mix of our business and has seen rapid adoption across our customer base as reflected by strong consumption trends, we're especially proud of our performance given the uncertain macro environment. We're currently operating at.
I'll start by touching briefly on this topic why confluent continues to see strong demand. Despite economic headwinds. There are two reasons for this durability first our product sits in the operational stack powering applications that directly serve critical business operations in real time customer experiences given this criticality it can't be switched off.
About a complete disruption to the operations of the business.
Our 2022 state of data in motion report underscores this finding that of the nearly 2000 <unk> engineering leaders surveyed more than 80% said real time data streams are critical to building responsive business processes and rich customer experiences.
Second one of the key value propositions of our managed cloud service such as confluent cloud is cost savings using confluence cloud has significant tcl advantages compared to trying to build out to internal teams of engineers to attempt to build internal services around open source.
SaaS Institute is a customer that perfectly illustrates these dynamics SaaS as a marketing analytics powerhouse, helping more than 80000 businesses like discover Honda Levis unnecessarily transform data into real world intelligence, making their marketing campaigns more targeted more personal and more relevant.
SaaS initially built its real time data platform, an open source kafka, but they soon ran into scalability issues from self supporting open source cockpit that made it difficult to adjust to changing demand plus the operational overhead and complexity, we're driving significant costs. So SaaS turned to confluence for a complete data streaming platform that scales, both compute and <unk>.
George on demand, even amid unpredictable ebbs and flows of traffic with confluent now as the backbone of their next generation customer intelligence 360 platform SaaS can easily stitch together data from multiple sources to find and act on fresh and timely insights for their customers.
Key to this ability to serve mission critical use cases and to help customers recognize the cost and agility advantages I described are the underlying capabilities that confluence cloud provides kafka has become ubiquitous and as the de facto standard for data and motion used by over 70% of the proportion of 500, but confluent cloud is not just a matter of putting kafka in the cloud.
In building confluent cloud, we rethought virtually every layer of the stack from how data is routed over the network. How it is processed were displaced and how it is stored this deep engineering investments as necessary to provide a truly cloud native service that can meet the needs of the most mission critical use cases and can help customers truly step back from the operations of the service.
Focus on their applications to achieve this over the last five years report more than $3 million engineering hours into confluent cloud today. It represents a tenex better Kafka service with a deep competitive moat of hard technology.
By making a service that is tenex better than open source kafka confluence lets organizations avoid investments in low level operations monitoring and scaling and be able to instead rely on a service that can scale elastically with their needs. This is what drives the substantial cost savings customers see when they adopt our service as we shared last quarter a recent Forrester study <unk>.
<unk> savings of more than $2 5 million for businesses that use confluence translating to an ROI of 257% and less than six months.
Another example that demonstrates both the mission critical nature of our use case as well as the economic value of conclude cloud as EPC, a leading electronic toll collection company to support next generation congestion management services UTC collect real time sensor input for millions of cars and Iot devices across city transportation corridors totaling two.
Toll transactions per year by collecting and processing this data continuously and in real time with Kafka ETE produced the first truly predictive dynamic pricing algorithm in the industry, but as their use of kaka skyrocketed from Onboarding, new customers increased traffic congestion and expanding toll and smart mobility projects. So did their total cost.
Of operating and maintaining open source Kafka after conducting an internal tcl analysis DTC move to a fully managed kafka unconquered cloud by making the move to confluent cloud Etc's shaped an average of 20% on infrastructure costs significantly reduced their downtime risk and was able to reallocate it about 50% of their engineer.
And development talent that was dedicated to managing kafka to more strategic projects and accelerate innovation.
Our relationship across the software and data landscape remains core to our everywhere pillar of differentiation and are a key part of our go to market. We made a few notable announcements on the partnership front that deepened our key partner relationships first we are thrilled to announce the launch of a confluence cloud reseller program organizations can accelerate their adoption of data in motion by purchase.
<unk> confluent cloud directly from the consulting partners they already work with who know their business and could offer localized support to start. This program. We expanded our strategic collaboration agreement with AWS by joining the marketplace Channel program consulting partner private offers.
Now we can work with 17, leading data streaming partners, including slower magazine and SBA to make it easier for our customers to unlock the full value of data streaming throughout their business.
This quarter, we were also recognized by both Microsoft and Mongo DB as one of their top partners for 2022, we're incredibly proud and thankful for our strong partnerships with cloud service providers and technology partners.
I'd also like to spend a few minutes on work, we're doing to accelerate usage for customers at the early stages of their data in motion journey. We've previously discussed our customer growth go to market model that builds a product led consumption oriented journey down the data in motion adoption path.
The early stage of this journey is particularly critical for customer acquisition and for making confluent cloud the default starting point for developers.
This early stage of adoption often starts with developers experimenting with pilots and proof of concepts or simply learning the new technology at this stage, it's critical for the Onboarding process to be low friction. So developer can instantly gain full access to the power of our platform with minimal disruption to.
To make this process even easier for developers I'm very pleased that towards the end of our first quarter, we removed the requirement venturing credit card information for the free trial of our product. This paywall removal is a strategic move that aligns well with our customer growth go to market model, allowing us to reduce the friction for developers to test our product grow usage and progressed to the production.
<unk> stage and we are already seeing strong returns at the top of our funnel as evidenced by the accelerating growth in Q2 sign ups, which are up more than 130% year over year and up more than 50% sequentially. This paywall removal has been incredibly successful in increasing sign ups, but it has also created some short term noise in our total customer count metric.
Users, who would have incurred small amounts of spend and Ben previously counted as customers in their initial trial phase will now show up as just sign ups, not paying customers, which impacts our customer count growth. In Q2. This means that the change has eliminated a large chunk of preproduction customers paying us an average of less than a few hundred dollars per quarter.
Creating a reset of our pay as you go customer count reset of customer counts aside it is unquestionably the right strategy for our business as our customers can now test drive risk free and for US the reduction in developer risks and friction drives easier land and ultimately more paying customers as the larger cohort of trials leads to sticky production applications that.
ROE and expand at scale and finally I'd like to share that after a four year impactful run at confluent <unk> Srinivasan, who will be stepping back from his role as chief product officer, I will be acting as interim chief product officer, as we search for a new leader.
We wish you all the best and thank you for your many contributions thanks again for joining US today, we remain very confident in our market opportunity and positioning headed into the second half of the year and we look forward to seeing many of you on the road in the coming months, including at current and new data streaming industry event, we're hosting in October with that I'll turn the call over to Stephen to walk through the <unk>.
Financials.
Thanks, Jay we delivered a strong second quarter exceeding the high end of our guidance for the fourth consecutive quarter key.
Key highlights include strong comparable in cloud growth.
Best in class net retention and significant margin improvements, which are a testament to the team's performance.
<unk> in the second quarter grew 81% year over year to $591 3 million current RPF estimated to be 62% of <unk> was approximately $364 million up 62% year over year.
Total revenue grew 58% year over year to $139 4 million.
Subscription revenue grew 62% year over year to 127 million and accounted for 91% of total revenue.
Within subscription confluent platform revenue was $80 million up 36% year over year and accounted for 57% of total revenue with Commvault platform, we're positioned to address the broader opportunity around hybrid cloud where customers bridge between on Prem and multi cloud environments using complement platform and adding <unk>.
<unk> cloud over time.
Commvault platform subscription model also adds more visibility to our revenue streams.
Comparable in cloud revenue in the quarter exceeded our expectations up $8 1 million sequentially, representing our largest net revenue growth to date on a year over year basis cloud revenue grew 139% to $47 million and accounted for 34% of total revenue compared to 22% of revenue a year ago.
For the third consecutive quarter comparable in cloud accounted for more than 50% of new ACD bookings.
Our strong cloud performance was driven by healthy consumption across industries with particular strength in technology and financial services.
Turning to the geographic mix of revenue.
Revenue from the U S grew 54% year over year to $87 6 million.
Revenue from outside the U S grew 64% year over year to $51 9 million.
Turning to customers.
The growth in our large customer base continued to be robust we ended the quarter with 857 customers with at least 100, KN <unk> up 39% year over year.
And 107 customers with at least $1 million in <unk> up 53% year over year or 100, K customer cohort contributed more than 85% of total revenue in the quarter in line with historical trends, our diversified customer base spans across various industries, including financial services technology retail <unk>.
Telecom public sector health care media and entertainment and many more.
Total customers ended at approximately 4120 of 46% year over year and flat sequentially there.
There are two components of total customer account pay as you go and committed contract customers as Jay discussed earlier paywall removal has driven strong growth acceleration in sign ups, which is a key indicator for the overall health of our customer funnel.
It's a testament to the strong demand for our cloud product, while paywall removal had a short term impact on the number of pay as you go customers in our total customer count we're very pleased to see the continued momentum in our committed customer base.
We added 128 net new committed customers in Q2 compared to 113 in the previous quarter and <unk> 80, a year ago.
The vast majority of our revenue is attributed to our committed customers, which provides a high degree of visibility into our revenue in any given quarter.
Dollar based net retention rate in the quarter remained above 130% for the fifth consecutive quarter, driven by 90% plus gross retention and strong expansion across both of our product offerings.
And our for cloud was substantially higher than the overall NR for the company and NR for hybrid customers continue to be the highest.
Moving on our gross margins and profitability I would like to note that I'll be referring to non-GAAP results unless stated otherwise total gross margin was 76% and subscription gross margin was 76, 8% our platform gross margin remains steady and strong.
Our cloud gross margin improved substantially driven by our continued efforts to optimize hosting costs and improved pricing with our cloud service providers, which offset some of the headwind of a higher cloud revenue mix to total gross margin the concerted efforts and focus on improving the unit economics of the cloud business have been paying off and will continue to drive efficiency.
In the future.
In the near term, we continue to anticipate total gross margin to fluctuate near our midterm target of approximately 70%.
Turning to profitability and cash flow operating margin improved eight percentage points year over year to negative 33, 5% the.
The improvement was driven by revenue outperformance, improving sales efficiency and our focused efforts to proactively manage spend across the organization such as controlling the rate and pace of hiring.
Net loss per share was negative <unk> 16.
Using $278 3 million basic and diluted weighted average shares outstanding.
Free cash flow margin improved approximately 25 percentage points year over year to negative 26, 5% driven by strong collections.
We ended the second quarter with $1 $96 billion in cash cash equivalents and marketable securities.
Now I'll turn to our outlook.
We're raising our revenue and profit guidance for Q3, and the year, but the magnitude of the raise has been tempered by the current macro dynamics.
Towards the back half of June and through July we saw increased scrutiny on deal approvals.
We believe this is driven by customers cautious view on the current macro environment balanced with their need to continue with the digital transformation initiatives with data and motion being a must have capability.
We are assuming this dynamic continues through the rest of the year and have estimated approximately $2 million to $3 million negative impact on our Q3 revenue guidance and approximately $4 million to $6 million negative impact on fiscal year 2022, we've adjusted our spending levels in the second half to ensure we meet our operating margin targets in <unk>.
Incremental investments, we make will be in the highest ROI segments of the business.
We will continue to monitor and course, correct, if the conditions change materially and action is warranted.
Our goal in the midterm remains delivering high growth with annual margin improvements and turning non-GAAP profitable exiting Q4 2024.
Turning now to guidance for the third quarter 2022, we expect revenue to be in the range of $143 million to $145 million representing growth of 39% to 41% year over year.
Due to our Q2 sequential outperformance, we expect Q3 sequential cloud revenue net ads to be between eight and $8 5 million and.
And we expect non-GAAP operating margin to be approximately negative 33%.
non-GAAP net loss per share to be in the range of negative <unk> 19 to negative 17.
Using approximately 282 million weighted average shares outstanding for the full year 2022, we expect revenue to be in the range of $567 million to $571 million representing growth of 46% to 47% year over year.
non-GAAP operating margin to be in the range of negative 35 to negative 34%.
And non-GAAP net loss per share in the range of negative <unk> 73 to negative 69.
Approximately 280 million weighted average shares outstanding.
Turning to free cash flow.
We changed the structure of the payout for the annual bonus from one lump sum payment in Q1 23 to two payments one in Q3 2022 of approximately $14 million and the remaining payment in Q1 'twenty three.
Due to the timing of these payments Q3 and fiscal year 2022 free cash flow margin will be lower than originally anticipated while FY 'twenty three free cash flow margin will be better than previously anticipated.
Before turning to Q&A I'd like to invite you to join our Investor session. At current 2022 on Tuesday October 4th and Austin, Texas.
We will provide an update on our strategy product and customers.
To join in person please contact IR for the registration information.
Program will be webcast live on our IR website, beginning at <unk> PM Central time.
In closing our second quarter results underscore our ability to drive high growth with increased operating leverage while the near term macro environment is uncertain. The secular tailwind for data in motion is firmly intact with our market, leading data streaming platform and a track record of delivering on our commitments, we're well positioned to drive durable growth and improved <unk>.
Profitability ahead now.
Now Jan I will take your questions.
Thank you Stephan please raise your hand on zoom, if you'd like to participate in the Q&A, we will pause a few moments for our team to assemble the Q&A roster.
And today, our first question comes from Jason Ader, with William Blair, followed by UBS.
So it is in ICU.
Hey, guys.
So yes, I wanted to ask you about the macro impacts just starting out.
I think Comcast did require some planning and requires some process change.
Is that is that where the impact is customers sort of maybe slow down a little bit on the pace of some of those projects and then.
<unk>.
How do you expect that to play out as we go through Q3.
Yes, I mean, what we actually saw was continued strong demand and I would say some sporadic delays in deals.
So I would say, maybe more finance inspection and a little bit longer or another round of review kind of inspection of <unk>.
We saw that across Geos and segments. So it wasn't really a.
<unk> thing, but it wasn't hugely widespread and I think all of that's factored into the guidance. So we kind of took a look at that we said well what do we expect going forward I think probably more of the same I think.
We haven't seen any of those deals that kind of went through further review be lost but.
They have been delayed.
And I think Thats, a testament to the kind of overall work, we've done on Tcl and making sure that that story is strong.
Maybe a quick follow up just on use cases, you talked about some of those on the call.
Are there any examples that you can think of in the quarter, where you guys were like Wow. That's a really cool use case that we've never seen or or maybe in a vertical.
Maybe in the past and that will be obvious that there would be a use case for for conflict.
Kind of curious about that yes, I would say the trend I'm. The most excited about is kind of that move to some of these really central use cases, where it's kind of broad across the company. We've seen a number of organizations doing that.
<unk>.
Some of the customers that started on premise as they graduate to the cloud taking that on so.
That was probably the most exciting trend I noticed was just some of these early on premise folks now going back in the cloud and seeing some of the results of that thank.
Thank you.
Alright, Thanks, Jason we'll take our next question from Carl <unk> with UBS, followed by Morgan Stanley .
Okay great.
Thank you Shane so maybe maybe two questions.
Steffan, you mentioned that there was outperformance on the cloud side and <unk> and Thats why you were assuming a roughly similar sequential improvement in <unk> was there anything unusual stuff than you would call out on the cloud performance in <unk> any.
Pull in et cetera, and then I've got a quick follow up on the platform business.
Well, we're very pleased with the record performance in Q2 sequential for cloud, we didn't see anything unusual or a pull forward and we just saw broader adoption and consumption patterns across really our entire customer base.
Which was very.
It's very good to see so we also gave that additional guidance for Q3.
Help calibrate and level set folks' expectations, and we're still calling for sequential growth.
For each of the borders between Q2 and Q4 of this year, so very healthy growth and.
We are well positioned to deliver that got it congrats on that number as Stephane and then on the on the platform side. When you initially set guidance for 'twenty two.
Your implied outlook for the platform business I felt like was a little bit conservative where perhaps you were prepping us for more moderate growth on the platform side, yet goodness on the cloud side yet.
That form business actually grew at a pretty healthy clip. It grew sequentially by $5 million, which is pretty similar to what it did in the year ago quarter, Despite that pretty strong cloud growth. So we really didn't see any sort of migration or trade off there anything that you would you would call out as maybe helping.
That platform number in <unk>, where maybe we just need to keep that in mind as we model the platform segment in the second half Stephan.
I think it's an important point here.
Implications of US building, a central nervous system for our for our customer base really means that we have to be wherever our customers data resides so that means on prem and the cloud and hybrid cloud environments and we feel like we are very well positioned to do that our CP business in particular.
It's going to continue to grow.
But as you look at the new ACD percentages that are coming in and how much is cloud versus platform.
Over 50% of new ACB has been cloud for the last three quarters in a row. So by definition, we are going to see.
Somewhat more moderated growth coming out of.
<unk> <unk> platform, but the biggest takeaway is the commvault platform business is important because it gives us gives us an opportunity to upsell and cross sell Costello of cloud on top of those CP only environments and you look at our <unk> numbers.
Our total <unk> and then also for hybrid and cloud.
The hybrid and cloud and our numbers are greater than that in the total company average got it okay, well nice job Jay and Stefan I know, it's I know, it's a tough demand backdrop, so well done.
Thank you.
Thanks, Karl we'll take our next question from Sanjay <unk> with Morgan Stanley followed by Wells Fargo.
Hey, Sanjay.
Hi can you hear me.
Okay, sorry about that I'm not sure I can see the video, but that's okay.
Hey are we going to start with video.
I really appreciated the framework on the guidance.
That was super helpful and gives us a way to sort of.
Map to how youre thinking about the environment today I wanted to take we wanted to get your opinion on how this softening demand environment. This downturn might compare to what we saw in 2020 and there was some in some industries some sporadic customers sort of downgraded to Kafka and given what you said on your <unk>.
<unk>.
In your script around.
Sandlin saw being 10 X better than CAFTA.
What do you think the risk is in that in this downturn that customers would choose to potentially move from paid console at either platform or cloud to open sort of Costco, how does that how does the dynamics have changed in 2022 versus some customers choosing to go that route during the height of the pandemic, yes, I think that dynamic has changed.
<unk> significantly and I would say really for two reasons. The first one is what I touched on which is actually our product is much better and you would think all of that was just a few years ago, but comprehensive a young company. So maybe as a percentage of our life. We've done a lot of development in the last few years, those kind of like pillars of differentiation around <unk>.
<unk>.
Dave and completing everywhere, there's a very real and it's meaningful to customers and.
That analysis of <unk>, and our ability to communicate that.
Actively and Believably to customers has gotten much better.
So I think that's the first reason is actually.
It doesn't make sense to.
Get off of our cloud platform and go to try and hire a team of engineers and that's not going to pencil out positive.
By any means so I think that helps us significantly the second thing that I think has helped us.
Is it really just the maturity of the field organization start to finish from account management I'd say customer success, we're just much better at helping to support our customers and getting them through to that production use cases that are the thing thats going to be sticky and I think that shows up in the results as well got it and then my follow up was sort of around the announcements on getting there.
The paywall makes a ton of sense and driving that that those sign ups and so I think your top of funnel is probably to see a lot of healthy growth.
Historically in terms of customers, making it to that 100, K threshold, what does that sort of conversion look like and what's sort of your view or optimism that increasing the sort of top of funnel will help you saw some customers that can make it to that 100 K cohort, yes, it's very high I mean, the in the area.
We're in it is very important that we have the open source and in many ways, but kind of self service cloud is like the open source is that kind of frictionless thing you can build again, so I would say a significant portion of our customers either coming from that open source usage or come from self service with cloud, which we see as kind of the future of <unk>.
That open source adoption, so it's actually quite important to plant those seeds, sometimes that path is a little bit winding that first use case may just be some developer playing with it and trying some stuff out it may be several opt in a totally different person who signs up and does it later, but it's still actually really important and thats why we have that continued investment.
<unk>.
At the top of the funnel.
Versus just kind of going after enterprise, where theres a lot of dollars you have to have that broad spread and the push for US is there's so many open source Taco users out there we want to go get them all and so these are the investments that we think can set us up to do that overtime.
Perfect. Thank you.
Thanks, Sanjay we will take our next question from Michael <unk> with Wells Fargo, followed by Colin.
Yeah.
Hey, Michael.
Thanks.
I don't know if the video.
Fair enough.
You added record levels of new cloud revenue this quarter. It sounds like the commentary suggest youre expecting that can hold even with some of the impacts here.
Rising in June and July .
I'm just wondering if there is any if this is just sort of a function of the broader mix shift towards cloud or if theres any change youre observing in how customers are adopting <unk> technology <unk>.
You'd call out.
I'm imagining the flexibility could prove more attractive so I'm just wondering how much of that.
Direction, the market is likely to head anyways or if there's anything more recent to call attention to that yes. It's a combination of both I mean, I would say quarter to quarter, it's not like the dynamics of the product or the market changed dramatically. So there is just some seasonality to how this flows if you look at Q1 versus Q2 and we can.
Call that out previously, but yes, if you step back and you look over a multi quarter trajectory I think theres a significant mindset shift in a lot of these teams that would be our customers to move away from kind of hiring a lot of very expensive engineers.
Infrastructure.
Trying to find really high quality cloud services.
And build against us over the long term and I think that the customers who are doing that are actually getting the value back much faster than they are able to build and develop quicker and they're able to apply the resources to the thing that builds real unique competitive advantage for that company versus kind of lower level of infrastructure. So I think that trend.
Is absolutely a tailwind and.
As we've gotten to scale and have really checked a lot of the boxes on security reliability et cetera, I think theres, a pretty I think theres a pretty high bar. There for this kind of infrastructure you have to cross before you can start to pick that up as we've done that I think we've started to benefit from that as well where it becomes far less risky to work with a company like <unk>.
I think that's another tailwind.
And then the adoption of data and motion overall continuous bright and those are longer trends around just the use of data and the integration of software and how that's driving these more operational kind of run the business use cases.
That's great and just a quick follow up similar line of questioning you had some mutual comments around the hybrid use case and the expansion and retention rate there holding even stronger than the 130% youre seeing overall.
Is that something youre, finding repeatable the openness of confluence and <unk> ability to work across multiple on behalf of Doug.
Absolutely, yes, we keep coming back to it because I would say.
Out there there is definitely a set of people who see our come through a platform to confluent cloud is that kind of transition where customers will delete the confluent platform and install the confluent cloud. So it's actually a little bit different from that like this has to span that are different environment. So it's typically an expansion out into these cloud.
<unk> as projects are happening there in each of these customers.
That ability to bridge between is really strategic like one of the key problems you have to solve if you want to get meaningful amounts of workloads into the cloud is how those can tie back into all the legacy data systems and applications on premise and we think that we have.
Key strategic role in that and that's actually quite important for a lot of these organizations.
Not practical for them to turn over their full suite of software investments into cloud native applications in any kind of short period of time some of these customers.
Significant investments are there some generations back on mainframes right and so it's all going to make it to the cloud, but that time period is fairly elongated and how it all works together as one company in the interim period is incredibly important. So this ability to both bridge across be able to connect to the new and the old and move to the more real.
<unk> streaming event driven architecture, they want any way is a big deal.
That's great nice job here.
Alright, Thanks, Michael we'll take our next question from Derrick Wood with Cowen followed by J P. Morgan.
Great. Thanks, Nice to see you guys I.
I guess my first question, Jay we get a lot of questions around the puts and takes of your cloud consumption business and what we've heard from from Snowflake.
As a comparison is a lot of customers will kind of pump a lot of analytic workloads into the system and drive a lot of consumption that growth and then go through this kind of optimization cycle, where consumption flattens and then start to see more workloads.
Grow again, and maybe we're in a little bit more of an optimization cycle right now, but I'm. Just curious do you guys have a similar dynamic where we're <unk>.
Through these optimization cycles or because you are more centered around transactional workloads not tend to see that kind of behavior, yes, I mean, certainly any customer as their spend gets to scale looks at Hayes well spent and we're using inefficiently. We have a lot less of that I think then.
Things that drove serve production use those workloads like production workloads, usually kind of come out optimized as it where they have a development days, where youre kind of building in some of the data warehouse usage is more AD hoc reporting things that are kind of thrown together and so I think you do kind of accumulate more and then Bruno.
Back so maybe in that respect we might be more comparable to something like Mongo, DB, which is serving more permanent applications in our usage patterns.
I haven't either.
Enough that the dynamics of snowflake to stay at that comparison is accurate in terms of us that is.
This idea of production workloads is actually quite important and in conversations with investors. There has been this idea that like Oh as soon as there is some economic pressure like consumption is going to drop.
That hasnt been what we've seen and it's certainly not what we saw this quarter.
Okay.
Steph and one for you just looking at the Q3 guide and knowing that Youre expecting eight to eight 5 million and cloud quarter over quarter build.
That would suggest some downtick in another line item, whether it's platform or professional services and <unk>.
Platforms, obviously, the bigger revenue piece, so what would cause platform revenues to be down sequentially, especially kind of in light of that being a stronger government quarter, which tends to be purchased more.
Platform licenses.
It really comes down to.
How the mix of business is coming in we have one sales force and they sell.
We're selling them a solution.
<unk> right.
The fact that we've had 50% of new HCV coming in.
That's been cloud for the last three quarters in a row is a dynamic at play.
We still think that theres going to be just healthy business coming out of Commvault platform for Q3, but the way that the.
The models are working we're anticipating that.
<unk> cloud will continue to grow very healthily Commvault platform will will be a contributor for sure but won't be as pronounced.
In Q3.
Typically we would see a little bit of a bounce back in Q4, because thats the.
End of the year buying cycles and Thats when <unk> platform typically has a very strong sequential.
<unk>.
Got it helpful color. Thanks, Scott Thank you.
Alright, well take our next question from pendulum born with JP Morgan followed by Goldman Sachs.
Okay.
Hey can you guys hear me.
Not clear yet.
Okay. Thanks for some reason I kind of started to video Oh here. It is.
It seems like everybody has the same problem.
I wanted to ask you.
About the margin guidance.
It seems like Opex is in the second half coming down more.
The year over year growth of at least one when I look at it I think you talked about a little bit on hiring help us understand the levers that you're pulling in.
In the second half to optimize Opex.
Yes, so we haven't said anything.
Overly aggressive I mean, we see a huge growth opportunity and so for us it's about.
Hi sustained growth and.
Creasing improvements.
Operating margin in other unit economic metrics.
So we did.
Make some adjustments on kind of the timing of hires we did the kind of normal readjustment, we would do.
Half of the year, just moving spend to IRR ROI programs and efforts.
All that did add to the savings, we would expect and we've seen already.
Some of that play out interest rate so.
So we're happy with the improvement.
We have kind of plotted out our trajectory and this gets us a little bit towards our goal, even a little faster than we'd hoped.
Just to be clear.
In 2020, when Covid hit.
Paused hiring completely right. So this is not anything.
Close to that yeah, no nothing like that understood.
One technical question I guess for Jay.
The zookeeper dependency.
<unk> gone from $2 eight or so.
Nothing like that I look at Amazon <unk>, They still talk about zookeeper. So are they running a few steps behind in terms of cash conversion and then the zookeeper independents are gone does that help you in your cloud gross margins, yes, yes, yes.
That was a dependency in the open source that people don't like and so we've done work to take a lot of this workloads as it's about how do you manage the internal metadata how do you hope that scale up for very large use cases, so that's kind of how it helps as well as just the simplicity of our users getting started.
As to Amazon's product they do tend to be a few versions behind the current state is we built a self hosting costco with no dependency on zookeeper, that's going through a set of iterations that make it kind of increasingly.
Production ready and its on a great path. So we're seeing already kind of early folks who are adopting and playing with that and we expect that will become kind of the more mainstream.
Overtime.
Will that help US yes, it will it will definitely lower the cost to serve particular use case, because we won't.
From an aircraft.
Thank you. Thank you ma'am.
Alright, Thanks pendulum will take our next question from Kash Rangan with Goldman Sachs, followed by Bank of America.
Hey, Thank you guys.
Sorry for background, Boston tier greetings from Boston.
Secondly, great job that just in the quarter and the outlook.
Curious.
We're doing any kind of gone through let's just say, what we're going to close an economic downturn.
Companies redefine value proposition.
Architects shows generally.
Ill leave of confidence to change they've seen how are you.
<unk>.
A change in your go to market approach in order to get people over the Vince poorly you have done a great job, but with the technology.
That's sort of a contention costco versus.
Conflict commercial.
But I'm curious.
Our thinking about changing go to market strategy.
I mean that is tough times will last for a long time higher interest rates higher generation hardware based that sort of thing.
Yes. Thank you.
What I'm getting at.
Yes, it's a really important question so.
That we show a little bit of that customer growth go to market graph of kind of the stages for our customer. This is why the early stages are so important when we land.
With a customer we're not landing for architectural change it's.
It's not like Halo installing new central nervous system. We are lending for you guys like we're landing for one useful valuable application and then we want to grow from there in an organic way that also solves for that bigger picture, that's something that we've put effort into from the early days of the company to make that kind of gradual path.
Z to realize and I think it's really important I think if we didn't have that we would suffer from what you described which is like hey.
We do we want to make some big investments in some change in data flow, maybe maybe not it's very important that each step on that journey.
A liver value project by project that's critical for us.
And so I think that's the first thing to understand the second thing is how do we adjust in a more difficult environment I would say probably the biggest adjustment we haven't seen.
The need for this we're still seeing lots of new use cases happening, but if we see a slowdown in net new use cases, we would shift to more of the conversion of open source Kafka, where there is a very significant installed base of Hawkeye shared some stats on that in the last earnings call and so the migration of that over to come through.
Cloud is a significant.
<unk> of usage to fish out of and so if we see a.
Some slowdown overall software projects, obviously, we will still get the ones that are happening that we would compensate by focusing on that work both for the new use cases and for those conversions. They rely on that underlying <unk> analysis of like Hey is this better should I build on this cloud service is that going to be.
Both a better product, but also something thats cheaper than a better payoff to me what I consider all my costs.
Alright, Thanks, Kash, we will take our next question from Brad Sills with Bank of America, followed by Deutsche Bank.
Great. Thanks, David good to see everybody.
<unk>.
Wanted to ask a question around sorry about the echo here.
No problem.
Is that.
Better.
I think there is something going on.
Yes, we can hear you okay.
Okay Alright.
My question was on net revenue retention.
Outpacing net revenue retention overall, what is it about a cloud deal.
<unk>.
Great.
Overall.
Fourth platform.
Yeah, Yeah, so for anybody who missed the last but I think the question was why is cloud NR higher it's really both sides right said that retention is better.
With your <unk>.
Building against a running cloud data service as that gets to larger and larger scale. It gets harder and harder to move off of it especially for something like confluence where there's many applications in different parts of the business that are attached to this than you would have to all agree to be able to switch together.
And.
In that respect it doesn't suffer from.
As much competition from the opening stores that kind of becomes a very difficult path to pursue so thats on the retention side on the expansion side I think it's mostly just about the ease of realizing the value.
One of the things for a large enterprise, it's often hard is spinning up a net new production data platform. Some big distributed system hiring the team are very specialized people getting all the servers being able to scale that doing that reliably enough that you can build against it and all the teams can kind of count on it as a utility that's actually really challenging.
And even if they master that Corbett getting to kind of the full ecosystem for data in motion, where we would offer and our product is usually out of reach so all the connectors and extreme all this stuff that teams need to be successful. They typically won't have that so then why why does cloud expand faster is because it's much easier to just go and build your.
As you can get the value out and so those are the two factors that I think private.
Great. Thanks for that Jay and then one more if I may.
Any color on.
Our smooth.
Hi.
Workloads that we're seeing more applications.
Bert was talking about new opportunities.
As we've talked about we produce products.
Thank you.
Does that mean youre, starting to see more of that replacement cycle.
Yes, we've always had elements of replacement, it's typically not exactly one to one but I would say that there is replacement of.
Legacy messaging and middleware layers.
<unk> have more batch database processing replacement at some legacy <unk> data movement products.
When we're doing analysis with customers, that's typically where spend and budget is freeing up from I don't think we've seen a big shift in that mix. It is.
Some new stuff and some freeing up of old stuff and oftentimes the new stuff is replacing some of the old stuff. So I would say broadly that the mix is similar to what it's always been.
Thanks Jay.
Alright, Thanks, Brent we'll take our next question from Zelenak with Deutsche Bank, followed by D. A Davidson.
Thanks, So much for getting me in and congrats on the strong growth guys and nice margin progression Stephanie the change in timing on bonus payments can you just share what inspired that and are there any changes in your philosophy around equity versus cash comp and how is that evolving maybe just given what seems to be an easing labor dynamic out there. Thanks.
Good question. Thanks, Thanks for that Brad.
What we are looking at overall compensation for our employees.
This year, we originally had decided to move to a semiannual payout for our bonus we decided to move to an annual payout from a bonus standpoint.
For this year and given kind of the dynamics that we've seen just with stock price and with.
With other things that our employee base is going through we wanted to be in play friendly and.
And effectively go through and have the semiannual payment structure for this year.
Instead of an annual payment structure and.
That was a conscious thing that we did.
And that was well received by our employee base.
And it has really no impact too.
Free cash flow over call it a.
A couple of year basis, because it's really a timing of cash flow payments.
So we feel good about that.
And then as far as.
Equity versus cash we've been very selective in terms of.
Sure that our top talent.
Is it.
Is taken care of and we also are making sure that our employees are compensated.
According to market. So that's something that we will we have been doing and that will continue to do going forward to make sure that we have a fully engaged employee base.
And I think our following question maybe around attrition attrition has been.
Trending better than we expected.
And we feel good about.
Like the health and to.
The health and wellbeing of our employees.
Excellent. Thanks for the clarity nice to see you and that's it for me congrats great. Thank you.
Alright, Thanks, Brad we will take our next question from Rudy Cal singer with da Davidson, followed by Barclays. Great. Thanks for taking my questions guys.
The total customer count I know there is the pay as you go guys that causes some messiness there, but the total count was flat quarter over quarter. So have you seen a slowdown in those new pay as you go trials I guess, maybe just given the macro people are more hesitant, even if it's free to start new projects, yes, we haven't seen any kind of macro.
Impact theres enough changing in that area that it would be very hard to disambiguate.
At the top of the funnel, we actually saw very strong growth. So like 50% more sign ups. Those people are getting into usage is very strong we think over time that will lead to.
Increasing customer ads at an even better rate. So we feel pretty good about where that will go into a new funnel. So we have to.
Work through all the details of that but it's actually I think a really important strategic move for us got.
Got it and then you mentioned that the follow up.
Ones that really just quickly.
Your question was more on pay as you go but I do want to just point out that firm and committed customer standpoint, we did see really healthy growth.
More ads versus last quarter and last year.
And why is that important the vast majority of our business comes from our committed customer base.
And so.
That's the dynamic that we just we wanted to have reinforced as well.
Got it.
You mentioned the more scrutiny on the new deals I guess I'm curious with your existing customers have you noticed any.
Any notable amount of customers that are I guess slow down their expansion plans with <unk>.
<unk> I guess when you look at the impact to the year to $4 6 million impact of the guide for the year is that entirely from slower new customer adds or is any of it from.
Say generally scrutiny can come on either expansion new projects in the same company or new projects in our company, we don't yet sell too.
Little bit more pronounced probably on the new logo acquisition, because thats, probably when they do the most analysis, but yes.
Both of those.
Got that.
The stepping gave on the guidance kind of wraps up our summary of well netted all out what does it add up to probably something around that.
Got it thanks for taking my questions.
Absolutely. Thank you.
Alright, Thanks, Rudy our final question today comes from premium lifestyle with Barclays.
Hey, Raimo.
I can see you.
We have some new.
Okay.
Hey, Raimo I worry about that.
Hey, Raimo.
And too many mute.
Sure.
Hey.
Great question.
Morris.
So if I'm the last one in the queue J J. If you think about your cloud mix, we're moving toward slate to 50% range et cetera, what does it mean from an organizational structure in terms of how you're selling and how are you doing resources I know you talked earlier about the importance of having both but like.
Sales motion et cetera is there it seems to kind of need to start thinking about this becoming more and more like a proper cloud company and then I had one follow up.
Yes, yes, there is a significant amount happening around that and a significant amount that has already happened. So often these adjustments actually has to happen before you get the results. It's not it's not like we've been doing nothing and suddenly this happened and now we are adjusting but I do think theres continued advancement there so.
In particular, I think really leaning into the <unk>.
Sumption aspect of the business.
That customers can expand their usage 365 days a year without.
And do transactions only as needed to kind of take the commit up that's actually quite important that makes it much easier to add workloads to add use cases to spread to other teams lean.
<unk> leaning into that in how our team thinks and what we measure and monitor in customer usage and how the sales team is motivated that's incredibly important that we've done that in.
Some of the segments already.
But it's absolutely a journey across everything and I think thats an opportunity for us to.
Both accelerate growth and drive more efficiency by really focusing on the key things that matter to our customers and like delivering use cases to production and getting the value out of it and then to us in driving consumption revenue.
And then last question from me was on as you mentioned earlier.
In tougher times, you might want to lean more into the Kafka like where.
At the moment in terms of deployment models kind of self hosted in the cloud or that you're kind of on premise.
And how can you kind of help to kind of all that.
Drive that switchover, yeah, yeah, so the <unk>.
Use cases are where they are right. Many of them are on premise. Many of them are in the cloud the ones that are we can convert over easily or the ones in the top those are the ones. We can go get uncomfortable with cloud.
We think theres, a net migration of stuff into the cloud overall, and that's a natural cutover point to move to some different way of doing it I would say there is a mindset shift just happening in all types of companies Tech companies enterprise companies.
Away from kind of a do it yourself mindset on some of this infrastructure, which I think is just proven kind of expensive and unreliable and harder to scale and just a drag on productivity and so I do think we're just seeing that increasingly where companies a year ago would have told us that we're doing it ourselves. We're happy are now <unk>.
This doesn't make any sense like we have this large and growing team that kind of can't keep up with the needs internally like we need some solution for it.
Okay, perfect makes sense and congrats from me as well.
Thanks, so much.
All right that concludes today's earnings call. Thanks, again, everyone for joining us.
Okay.
Yes.
Okay.
Yeah.
Okay.
Yeah.
Okay.
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