Q3 2022 Confluent Inc Earnings Call

Okay.

Hi, everyone welcome to the <unk> Q3, 2022 earnings conference call from Sheng Zhong 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 fourth quarter of 2022 fiscal year 2022, and fiscal year 2023. These forward looking 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 non-GAAP financial.

<unk> 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.

A reconciliation 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 investors stock comp, one that IL and with that I'll hand, the call over to Jay.

Thanks, Jane welcome everyone to our third quarter earnings call I'm pleased to say the confluent delivered another strong quarter with results exceeding the high end if all our guided metrics total revenue grew 48% year over year to $152 million.

<unk> cloud continued to be the fastest growing area of our business with revenue up 112% year over year to $57 million. We are also continuing to increase our operating leverage with the 14 points year over year improvements in non-GAAP operating margin.

Despite the pressure from a more difficult macroeconomic backdrop, we think the strong and consistent results are a testament to our ability to drive durable and efficient growth. The rise of data streaming is one of the most fundamental shifts in the world of data soon it will be hard to imagine a time when companies didn't have ubiquitous access to real time data and ability to react to it instantaneously.

Apache Kafka has emerged as the de facto standard of this movement hundreds of thousands of organizations, including more than 75% of the fortune 500, using everyday for critical use cases across their business, but there are also incredible things happening within the larger data streaming ecosystem, including an extraordinary number of new use cases and technologies.

In October we hosted cards 2020 to the first ever industry event for data stream.

It put confluence at the center of the ecosystem brought together over 4000 attendees hundreds of ecosystem partners and more than 50 sponsors to learn network and explore the future of data streaming.

In today's call I want to give a view of this emerging data streaming category explained how it relates to some of the legacy technologies that replaces we believe data streaming represents a major new data platform that has the potential to be as broad in scope as databases have been however, many of the legacy products in this space have been quite limited in adoption and scope how.

How can we square the skyrocketing adoption of Kafka rapid success of confluence and expansive cmo's technologists have about streaming with more limited success previous tools in the space have had to answer that requires a brief excursion through the legacy technologies the confluent displaces.

Today, we can broadly think of three major states of software and data first custom applications that business is built from scratch and the operational databases that support them.

The hundreds of SaaS applications like Salesforce and workday it address common yet critical needs for business functions, and finally analytics systems improved decision, making.

Each of these areas has grown a set of AD hoc fragmented tools for integration and a primitive kind of data in motion. Let's review these previous generation of tools and then discuss how it is displaced by data streaming.

Custom applications communicate with message Skus database change capture products AD hoc API as an enterprise service buses. These technologies fit the real time requirements of application workloads, but were impossible to scale low level and labor intensive to work with and limited in their application.

SaaS applications. Meanwhile, grew their own set of tools, including proprietary application integration platforms business process management tools and bulk file transfers. These tools achieved some success in their domains, but we're again limited and scalability unable to handle complex data transformation or logic fragile to work with and disconnect.

Good for modern development platforms, finally businesses drive data into analytical systems, primarily through a combination of legacy <unk> or LTE tools as well as pre processing and data lakes. These tools support rich transformations, but are stuck with slow batch processing that makes the data hours or days late by the time. It arrives these.

These tools are all flawed in different ways. They are either slow and batch oriented non scalable require significant maintenance from centralized teams are unable to work with more sophisticated data and processing.

But more importantly, the critical problem is that in a modern company all three of the major states of data must be highly connected the custom applications must interconnect with the off the shelf applications and the analytics applications consider a simple example of a modern retailer data about what is selling as needed by dozens or hundreds of custom applications SaaS applications.

Critics platforms, having to create point to point plumbing across a dozen different tools for each use case is simply not feasible or scalable approach data streaming works by rethinking. This problem from the ground up whereas the previous generation of tools, where AD hoc and limited to a narrow domain data streaming starts with our broad foundational approach. It takes the core architectural.

<unk> have a database such as ledger of changes transactional guarantees horizontal scalability and easy dynamic data transformations and translates them from the world of data at rest to data in motion. We believe the results is something vastly more general and powerful than any of the previous solutions. It consolidates the fragmented ecosystem of integration tools with <unk>.

<unk> that can achieve all the capabilities each of the previous tools could not it's real time, it's horizontally scalable, it's transactional correct and it provides an open programmable platform.

This provides a solution that is better in each of the domains than the previous generation of systems, but its key strength is it treats data in a reusable manner. Our single stream of data compete all use cases, where their custom applications SaaS applications or analytics stores. This allows vastly more simplicity and reuse than previous solutions, but the power of data <unk>.

<unk> is well beyond the integration technologies of yesterday, because it starts with an open programmable foundation is not limited to building pipelines the stream processing capabilities and Kafka allow any application logic weatherford data transformation or applying smart business rules. This is what has made confluence of foundation for developing real time applications that react to the stream of business.

<unk> continuously.

The real time applications that organizations can build with confluence or limit us includes fraud detection fleet management customer 360 platforms real time inventory management and many more.

Thus, while each of the legacy technologies was limited in scope and adoption data streaming is much broader potential as it both consolidates this landscape and expands well beyond it indeed, considering the three estates of data I mentioned before the custom applications SaaS applications and analytics systems, it's worth noting that each of these is the repository of store data that is.

<unk> data at rest however, equally important is the data in motion that confluence is providing the underlying platform and foundation for we believe this data in motion represents a fourth the state of data, which will be equally critical to the operation of our modern business.

This background provides a good framework for contextualized ing a few exciting product releases from Concord, while confluence has revolutionized the underlying infrastructure for integration with data streaming some of the legacy tools still had one advantage, whereas confluence was primarily a programmatic tool. Many of the legacy tools were low code or no code buoys, which while limited and <unk>.

We're easy to learn and use.

This is what makes me so excited for our recent announcement of stream designer stream designer brings a dead simple UI for building pipelines familiar from other integration tools, but it does it on top of our modern data streaming platform <unk>.

<unk> designer is the first dragon drop visual builder to rapidly build and deploy streaming pipelines natively on kafka. It integrates with the core capabilities of our platform Kafka connect stream processing and governance to make building mission critical data pipeline simple.

Stream design are also makes deploying streaming data pipelines accessible to more people throughout an organization, including people less familiar with kafka users with different skill sets don't have to give up the power of the underlying infrastructure either they can seamlessly switch between the UI code editor and a command line interface to quickly Declaratively built data pipelines back.

Back in 2021, we mentioned the wide variety of up the stack use cases, we are uniquely positioned to address stream decided represents our first step in that direction and lets us serve the set of use cases broadly characterized as data pipelines.

This isn't the end of the story there by having one layer where data flows throughout the organization. This enables confluent to add additional value as data streaming use cases grow and real time data flows more freely across the business. It is critical that this data can easily be discovered understood and govern data real time stream governance advanced does exactly that the newest capabilities.

Our stream governance suite makes governing mission critical workloads at any scale more reliable with a 90, 995% uptime and the ability to add user generated business context makes it easier to find the data that's needed to power new use cases now customers can more easily scale the power of data streaming from individual projects to central nervous system.

For their business.

Taken together stream designer and stream governance advanced our powerful examples of the fundamental paradigm shift occurring within the streaming. They also show our unique ability to build out of the box solutions on top of our platform to reach a broader set of customers accelerate their adoption and grow our addressable market over time, whether it was once thought of as different software categories are to date.

Solid adding into one much more general powerful and valuable market data streaming platforms next I'd like to touch on something I mentioned in my opening remarks confluence is set up to drive durable and efficient growth, we've seen fantastic momentum to date, but what's most exciting is our approximately $60 billion market opportunity in front of US we started to demonstrate both the breadth.

And depth of this opportunity the breadth is captured by the massive adoption of Kafka, which provides a large installed base for new customer acquisition through self service on confluence cloud. This is foundational to our strategy of converting open source users and landing Greenfield customers in high volume. We've also shown the depth of the value of these opportunities with our ability to expand rapid.

The after we land a customer this is evident in our best in class large customer ratio were 22% of our customers have an IRR of 100 caremark.

But at the same time, we believe there are strong expansion opportunities with our largest customers still including those with <unk> of $10 million or more particularly as we make it easier to connect and consume data throughout the platform. We also continue to benefit from the secular move to the public cloud, particularly in an environment, where there is increased pressure for.

<unk> to run their businesses more efficiently our cloud native platform significantly simplifies operational complexities and reduces total cost of ownership saving valuable engineering resources allocated to manually building and managing lower level infrastructure tools like Kafka, a new Q3 customer is a great example of the cost savings with <unk> cloud.

<unk> is a leading cyber security platform for connected devices that enables its customers to discover and secure their cloud Iot and edge assets in real time today are Ms tracks over 3 billion devices for its customers from printers laptops and mobile devices to connected medical devices in factory equipment Kafka is a central part of their business.

Responsible for ingesting data by Directionally for billions of devices to provide real time protection and policy enforcement.

But with the rapid growth of its business and the proliferation of connected devices, the cost and overhead of managing open source Costco was unwieldy this quarter <unk> turned to confluent cloud for cloud Native Kafka service that can scale alongside its business.

It will be the central nervous system for our Mrs data streaming platform managing data from billions of devices in real time, all while enabling them to reassign, 70% of the expensive engineering talent previously focused on kafka to projects that moved the needle for the business.

The durability of our growth is also reflected in our ability to rapidly expand once we land a customer a great illustration of this dynamic is one of our largest confluent cloud customers as one of the highest traffic job websites in the world. This customer since more than four five gigabytes per second through confluent cloud everyday Costco was a no brainer choice to <unk>.

Start their data in motion journey, but they soon found themselves spending too much developer time, managing Kafka, our commercial relationship started with a small deal in 2020 for a single use case in a single business unit as that pilot proved successful we landed a $1 million plus deal that expanded confluent cloud to more business units across the company in <unk>.

Spired by our platform's extensive capabilities and an accelerated move to the cloud or customer re imagine their data architecture in 2021, leading to our first multimillion dollar deal with this customer as confluent became a critical unified data layer across the organization their annual spend surpassed $8 million.

As you can see what often starts as a small land for a single use case can rapidly expand to a large customer in just two years time, but we believe we are still at the beginning of a great partnership as use cases and streaming data become more pervasive throughout the organization turning to efficiency on a year over year basis, we improved non-GAAP operating margin by 2014.

In Q3 and eight points in Q2, we are pleased with the substantial margin improvements we've driven this quarter and excited that there are significant opportunities to continue these improvements, we're making substantial progress in creating strong connective tissue between our product led to an enterprise sales motion to help accelerate our customers' time to value and we are still early in leveraging.

Our partner ecosystem, and bringing to bear our solution in the industry focus is an eight year old company. We believe our go to market model will drive differentiation and separation from our competitors, which will generate greater leverage and efficiency in our model over time looking forward, we remain confident in our ability to achieve positive non-GAAP operating margin when we exit Q4 2012.

For confluence 10 year, Mark as a company our profitability timeline comparable to many of our successful high growth peers and finally, we're pleased to announce that <unk> has joined confluence as our chief customer Officer Ray joins us from new relic, where he most recently held the role of CCF, leading with solutions Engineering solutions architecture enablement and expert service.

His teams wed also like to thank Roger Scott for his leadership and impact while a confluence and wish him. The best in his next chapter to summarize we have entered the data streaming air Kafka is at the center of this movement, but represents just the foundation of the emerging platform. Our recent releases of stream designer and stream governance are great. Examples of this and show how confluence is moving up.

Stack to help our customers connect process store govern and share data from across our businesses. We believe this model will be the basis to drive continued durable and efficient growth for our business and allow us to capture the lion's share of our large market opportunity ahead with that I'll turn the call over to Stefan to walk through the financials. Thanks Jay.

In Q3, we beat our revenue and bottom line guidance as we've done in each quarter since going public.

Key highlights include strong topline growth, including the largest increase in sequential revenue AD for comparable in cloud.

Robust expansion of large customer cohorts, which translated to another quarter of greater than 130% net retention rate and a 14 point year over year improvement in non-GAAP operating margin.

Strong results reflect that our market leading data streaming platform continues to resonate with customers. Despite a cost conscious environment.

And we continue to demonstrate our ability to drive durable growth and improve efficiency and profitability turning to the detailed results I'd like to note. All comparisons are on a year over year basis, unless otherwise noted our appeal in the third quarter grew 72% to $663 5 million.

Current RPI estimated to be 62% of RPM was approximately $408 2 million up 59% total revenue grew 48% to $151 7 million.

Subscription revenue grew 50% to $138 7 million and accounted for 91% of total revenue within subscription compound platform revenue was $81 8 million up 25% and accounted for 54% of total revenue.

<unk> platform remains an important component of building in central nervous system for our customers and continues to drive upsell and cross sell opportunities for Commvault and cloud and we saw another record quarter of sequential revenue AD for comparable and cloud up $9 9 million sequentially and up 112% $56 9 million.

Representing 38% of total revenue compared to 26% of revenue a year ago.

Cloud accounted for more than 60% of new ACD bookings in Q3 marks the fourth consecutive quarter, where cloud accounted for greater than 50% of new ACB bookings.

As cloud accounts for a larger share of new ACB bookings comp one platform will have lower ACD and less upfront revenue compound cloud momentum was driven by our strong product advantage. Our continued focus on decreasing time to value and use case expansion leading to robust consumption across a broad spectrum of verticals.

Additionally, customers run their operational workloads on comp line and these workloads are directly responsible for driving the core operations of our customers' business, which reflects the mission criticality and resiliency of our data streaming platform turning to the geographic mix of revenue revenue from the U S grew 44% to $95 one.

Revenue from outside the U S grew 56% to $56 6 million on our last earnings call. We called out some deals that were taking longer to close in Q2 due to additional scrutiny in pockets across geographies.

While this dynamic has continued I am pleased to report that the vast majority of those deals were closed as expected in Q3.

Turning to customers, we added 120, net new customers ending the quarter with approximately 4240 total customers up 40%.

We're pleased with the improved sequential growth. Despite the continued impact of paywall removal.

This strategic move remove the payment friction for developers to test drive confluent and it continues to have a positive effect for new sign ups. As a reminder, we expect the impact of total customer count will take a few quarters to work through and new pay as you go customers do not have a material contribution to our revenue in any given quarter the growth in our large customer base.

Continued to be robust.

Customers with 100, K or more in <unk> grew 39% to 921, representing 22% of our total customer count and these customers contributed more than 85% of total revenue in the quarter.

Customers with $1 million or more in <unk> grew 53% to 113.

As discussed at current we have a growing number of customers with 5 million, plus and $10 million, plus and <unk> and we see strong expansion opportunities across our customer base, including these two largest customer cohorts dollar based net retention rate in the quarter remained above 130% for the sixth consecutive quarter driven by <unk>.

90%, plus gross retention and strong expansion across platform and cloud <unk>.

Importantly, NR for cloud continued to be higher than the company average and NR for hybrid customers remain the highest.

Period of tough economic times is when the real durability of demand for our product is tested and we think our consistent and strong NR is a testament to our <unk> advantage and the mission criticality of our use cases.

Moving on to gross margins I would like to note that I'll be referring to non-GAAP results unless stated otherwise total gross margin was 71% and subscription gross margin was 76, 9% our focus on improving the unit economics of our cloud offering continued to pay off driving another quarter of healthy gross margins. Despite a continued revenue.

Shift to comparable in cloud in the near term, we anticipate total gross margin to fluctuate near our midterm target of approximately 70% turning to profitability and cash flow operating.

Operating margin improved 14 percentage points to negative 28%. The improvement was primarily driven by improved sales and marketing efficiency and our balanced approach of investing in the highest ROI projects, while continuing to proactively manage spend across the organization net loss per share was negative <unk> 13 using 280.

$2 3 million basic and diluted weighted average shares outstanding free cash flow margin was negative 30% in line with our expectations as discussed last quarter, we changed our annual bonus structure by moving $13 5 million payout into Q3 'twenty two from Q1 'twenty three.

The bonus payment had a negative impact of approximately nine percentage points on free cash flow margin in the quarter and we ended the third quarter with $1 $94 billion in cash cash equivalents and marketable securities now I will turn to our outlook, we're raising our revenue and bottom line guidance for Q4, and FY 'twenty two the magnitude of the raise incorporates what we have.

Experienced since June we're deal cycles are elongated due to the additional scrutiny on budget approvals.

Our forecast assumes that this macro dynamic persist in Q4.

For the fourth quarter of 2022, we expect revenue to be in the range of $161 million to $163 million representing growth of 34% to 36%.

<unk> cloud sequential revenue add to be in the range of $9 $8 million to $10 million.

non-GAAP operating margin to be approximately negative, 28% and non-GAAP net loss per share to be in the range of negative <unk> to negative 14, using approximately 286 million weighted average shares outstanding for the full year 2022, we expect revenue to be in the range of $578 million to $580 million representing growth of <unk>.

39% to 50%.

non-GAAP operating margin to be approximately negative 32%.

And non-GAAP net loss per share in the range of negative <unk> 65 to negative <unk> 63.

Using approximately 280 million weighted average shares outstanding.

Looking ahead, while we're still in the midst of annual planning I'd like to provide a preliminary outlook for next year for the full year of 2023, we expect revenue to be in the range of $760 to $770 million incorporated in the preliminary revenue outlook is a negative impact of $12 million to $17 million.

Stemming from the increased scrutiny on deal approvals.

And we're assuming that the overall macro dynamic that we see today will continue to persist throughout next year and we expect non-GAAP operating margin for the full year 2023 will be approximately negative 21%. We will continue to invest with discipline focusing on the highest ROI segments of our business to drive efficient and high growth will monitor of course, correct if the macro.

Conditions change materially in action is warranted to ensure we meet our margin targets.

In closing our strong Q3 results are another proof point of our ability to drive high growth with increased efficiencies.

The demand environment for data streaming remains strong despite the macro dynamics around deal approvals are.

<unk> cloud momentum reflects our tcl value proposition the differentiation ever use case, driven consumption model and the mission critical nature of our cloud native platform.

Looking forward, we are well positioned to drive efficient digital transformation with high ROI for our customers now.

Now Jane I will take your questions.

Alright, Thank you Stefan to join the Q&A. Please raise your hand on zoom and when Youre selected please be sure to a new and turn on your camera, we will now pause a few seconds to assemble the Q&A roster.

And today, our first question will come from Phil Winslow with Credit Suisse, followed by William Blair.

Great. Thanks for taking my question and congrats on a really strong bookings quarter, but also delivering at a pretty impressive operating leverage J one of our takeaway from current 23 was that large a packaged coffee users are increasingly coming to the realization that open source DIY simply wasn't really scaling for them. They are therefore increasingly looking at confluent cloud now I also appreciate.

Hey to your customer example, on this call today, so with it budgets as there is a whole coming under pressure due to just macro how is this change in conversations with those open source Apache Kafka users in terms of the Tcl potentially moving those to.

<unk> cloud and then I just have one follow up for Steffan, great Great observation, that's exactly right. So the tcl angle of our cloud offering has been part of our sales process for a while now but it has kind of come to the forefront and it's one of a number of advantages of moving to.

A true cloud offering right you get a more complete product you get something that's really kind of cloud data than elastic and expanded as you need it and then it's actually just a better deal and we think that's compelling and so yeah. We see this kind of call them large tech customers that have a big installed base of Apache Kafka, we see that as a huge opportunity for us where they are.

Already using the open source.

In many cases, they started before there was a confluence or before whether it was a council of cloud, but now that we have a cloud offering that really works well at scale.

And is cost effective it kind of meets the needs of even very demanding customers, we're very optimistic about that segment.

Awesome.

It was great to see the sequential increase in conflict cloud and I remember you flagged out two quarters ago could you just remind us of the seasonality that you see there kind of Q4 Q1, just with the trend there because obviously the bookings were strong again at a high level this quarter, but just maybe.

Help us think through just sort of call. It the seasonality in terms of translating that into couple of cloud revenue.

From Q3 to Q4 from Q4 to Q1.

Absolutely yes.

So sure. So we are very pleased with the fact that we were able to deliver the highest sequential net add in Q3, $9 9 million for a powerful and cloud so that came in above our expectations.

And as we think to Q4.

We factor it in a couple of things into our guide for the nine $8 million to $10 million sequential increase.

Two main factors one is we have.

Very robust consumption modeling.

<unk> system that we use to help drive that and then we also learned from last year that at the end of the calendar year.

Some companies.

Aren't as aggressive in terms of deploying new workloads.

In Q4, as they look to lockdown systems.

For the end of the year. So we took that into consideration, we're very pleased though with the with the nine $8 million to $10 million.

Guidance range for the quarter, and then Q4 to Q1.

Typically most companies that have a hybrid revenue model.

Let's see.

Sequential net add from Q4 to Q1, but not at the same.

Right as the prior quarter.

Well, it's a little bit too premature to talk about specific.

Quarter as Asian of what FY 'twenty, three looks looks like we wanted to share that dynamic with you as well because.

When you look at the overall $707 60 to $7 70 range.

The growth rates that we're posting comp on cloud is going to be a continued driver and it is going to continue to account for probably two to three points of additional revenue share per quarter thread throughout next year.

Awesome gave us a great. Thank.

Thanks, Bill Thanks, Phil we'll have Jason Ader familiar I'm. There next followed by Morgan Stanley .

Okay. Thanks, Hey, guys.

I guess my question, well first I want to say great job on explaining the power of Costco I thought you guys did a really amazing.

Explanation really simple and.

And articulated.

But the history I think extremely well.

My question is on consumption.

Whoever wants to take it but we've seen.

Some other companies, obviously azure AWS mongo.

By this sort of consumption impact related to macro.

Doesn't seem like it's affected you guys as much maybe can you talk through that why yes, yes. It is.

An interesting one I do think this is more about the individual product or products than it is about just consumption models I think the amount of what the business model is when there is tight economic times customers look at Hey are we really getting the value out of this is there a way to use less seats less instances less servers or in a consumption.

Paula can we dialed down overall usage in some way right I think the reason that you see less of that with confluence.

A few things like one we tend to serve mission critical use cases, and there is a lot of use cases right. So the opportunity to expand is very large and that counterbalances any headwind from optimization that we've seen beyond that I think these mission critical use cases are important youre not going to turn it off.

In one quarter.

And they usually come out more or less pre optimized and so we haven't seen a huge amount of that in our customer base.

Obviously economic pressure does create kind of a headwind I think the tailwind in this area is strong enough.

Just doesn't show up and Thats kind of shown in the overall NR. That's remained strong I think shown in the kind of sequential net add in cloud.

And a quick follow ups for Stephen just on percentage of IRR through partners and then particular cloud partners can you give us those numbers.

Well, we don't break those out specifically, but what I can tell you is we saw tremendous growth from all the three main cloud service providers through the marketplaces.

We saw like the.

The best growth that we've seen in a long time.

From all three.

When we look at the overall mix of business.

Primarily.

We sell.

Direct to our customers and oftentimes, we fulfilled through the channel, but the marketplace business that we do with the three cloud service providers is definitely an accelerant and it's been a bright spot for us specifically that this past quarter.

And it has better unit economics for you.

It does for sure.

Thank you okay. Thanks, Jason we'll take our next question from Sanjay <unk> with Morgan Stanley followed by D. A Davidson.

Thank you for taking the questions guys. Congrats on a very very solid Q3.

I think over the past couple of quarters, you guys have talked about different use cases.

Another sort of take on that if you sort of aggregated up in your mind, what percentage of the business on selling cloud or overall is coming to supporting like operational use cases, whether it's just in time inventory or dynamic pricing something thats driving it more operational use cases versus.

Clubs were being used for.

Analytical decisions of support.

A more analytical use cases is there any way to think about that and how that maybe evolve over time.

Yes, yes, I don't have something more scientific and Theres, obviously, a set of use cases that kind of blur. The lines were okay. At some machine learning App, it's kind of analytics see but it does have some feedback loop into production.

Yeah, but I would say the vast majority are kind of operational in nature. They tend to be things built by software engineers rather than data scientists.

We do have an interaction with the analytics world where often.

Kind of a very significant feed into the snowflakes and databases and big worries of the world that we're not really competing with those technologies or replacing them I think to them. We would just be an upstream feed even though obviously in our domain.

The exciting thing doing data processing is.

That part of the in terms of just the position that you just laid out is that part of the reason why we're seeing relative resiliency versus some of the other.

Data platforms that are seeing customers optimize ration more yes, I think it's one aspect I mean theres a number of things I think when you peer behind the curtains and any of these companies I could speculate company by company, but I do think if you think about operational use cases. This is some chunk of software software engineers spent probably a better part of the year.

Or maybe a team of people that are part of the year building. It doesn't just get turned off and on so it's not like when we when we look at our spend on reporting for example, we realize out look we have a bunch of reports nobody looks let's delay.

It's pretty easy to do that and generally not the case with these kind of more core applications, but if you look at what happens with consumption. There is a number of things that impacted including just the particular product how much traction it has that space.

<unk> pulled all that into just the space, but I do think thats one important variable.

I think it's a positive thing to serve these mission critical use cases in this environment I think these things are typically like the very important big bet for the company is the thing thats likely to kind of go forward in a purchasing decision and Thats the thing Thats.

Unlikely to get cut when you are looking to optimize and I think that shows up.

In the continued expansion sequential add in cloud as well as we shared the gross retention number yes, I think all of that kind of supports that story.

It makes no sense and then one for Stefan Stephan. Thank you so much for the color on seasonality and consequent cloud as it relates to fiscal year 2003, the $12 million to $17 million.

Which I think is primarily.

Longer sales cycles any way to like.

I'll, just sort of arrive at that number and guidance more broadly in terms of setting expectations. This early just given the dynamics of your model.

How do you how do you guys sort of.

And sort of the underlying assumptions that got you to 2023 guidance.

Well it starts with.

The track record of us delivering on our commitments throughout FY 'twenty two and.

And the basis of the FY 'twenty two numbers, where it was say FY 'twenty two plan.

Right now we are in the midst of getting our FY 'twenty three plan, we have very good visibility to multiple streams of future revenue.

And then we also took a look at.

<unk> of drivers around productivity per head, we look at pipeline, we look at a number of other factors and then we layer on the macro dynamics that we've seen around sales cycle elongation.

And.

And through all of that process, we arrived with the 12% to $17 million headwind for FY 'twenty three that we're calling out and look the environment is.

It has been tough we've been able to to go through and execute against.

What we've done what we've committed to.

To folks and our level of confidence and enthusiasm around FY 'twenty three.

Is there right and so we are we take things into consideration like the macro and everything else, but at the end of the day, we felt good about the $760 to $7 70, and the improvement on operating margin.

We are definitely focused on balancing growth and profitability and that that has shown up.

Only this year.

But how we're guiding next year.

I really appreciate that thank you so much.

Alright, Thanks, Sanjay we'll take our next question from Rudy Cal singer with da Davidson followed by Colin.

Hey, guys. Thanks for taking my questions.

I know you've talked about the <unk>.

Macro.

Extended deal cycles et cetera, I guess I'm curious and you also talked about current customers, who can't really diluted diodes, you down, but I guess as you look at your current customers and the pace that theyre expanding to new use cases.

Is that pace changed over the last six months given the macro.

Yes.

When we kind of give that $2 million to $3 million of pressure for Q4 and as we did for Q3 I think that takes into account both new use cases like net new customers new use cases, as well as expansion and I think it's relatively similar between that.

Theres, obviously, a little more scrutiny on a new customer than on an expansion. The reality is there's a lot of use cases to go after and so despite that I think we've shown strong performance on IRR, which is kind of the best rollout staff that shows whats actually happening.

So I think that is the takeaway is we're kind of seeing that continue and then we did talk about hey, some some of these deals with flipped we felt confident they would close.

Last quarter and that was borne out the vast majority of those did close took a little longer but we were pleased to see that and I think that's credit to the strength of the TCR argument.

These things are getting a lot of scrutiny, but theyre going through with a lot of scrutiny.

Yes got it Stephen quick follow up given the commentary on 'twenty, three I know, you're not giving too granular details yet, but just with cloud expected to increase in two to three two to three points as a percentage of the mix.

Is it right to think that platform growth is really going to start to level off I think that forces you into about high single digits to low double digit growth in platform does that does that sound about right.

We'll be providing more color commentary around.

Guidance and mix.

On our Q4 call, but by definition given the mix shift that we've already seen this year.

With cloud.

A greater portion of new ACB.

By definition that means that <unk> platform.

Is is reducing in terms of percentage of ACB and we see that trend to continue.

So growth will be moderating for cop one platform with.

With that said compound platform is incredibly important and it's important for the solution that we're providing customers seem to be running their data in motion solution everywhere that means on prem hybrid cloud multi cloud.

And and so calling platform is going to continue to be a very important part of the story.

But growth.

We'll be moderating a little bit.

As we've seen this mixed shift and by the way the cloud.

Our cloud business continues to turn over performed our expectations and it's really being customer led and we feel like we're still in the very early stages of the growth curve with cloud.

Got it thanks, guys. Thanks, Rudy we'll take our next question from Derrick Wood with Cowen followed by Wells Fargo.

Great. Thank you for taking my questions great job on a solid quarter I.

I guess, Jay just to start with you going back to the <unk>.

Topic of this mindset shift from DIY to cloud that was certainly something we heard loud and clear at your conference two questions about this one as the shift happens how does this change the competitive landscape and kind a short list of vendors that companies may look at it and two how are you changing your go to market strategy for them.

Direct and indirect sales standpoint, as you as you really try to lean more into the cloud.

Yes, yes, both are excellent questions.

I think this is a very significant thing that's happening it's happening in the big Tech companies, where they have heavy investment that's happening in mainstream enterprise companies.

Looking at where resources are going and looking for a way.

The same thing better faster cheaper that's what this kind of time.

10 tends to encourage and Theres a really obvious one with these managed services, where you are putting a lot of effort into a very difficult problem that you are not doing well and there is a better better way to do it. So yes, we're absolutely seeing it what is it.

In terms of the competitive landscape I don't think it's a huge change I would say net net the folks who are.

Focus in an on premise world become less relevant and there are a set of companies that provide.

Something around Kafka support or some of these legacy technologies that primarily existing data centers I mean I do think there is there is a shift away from that stuff.

So that's a change I don't think its a dramatic change because we didn't view those as kind of compelling competitors to begin with because this shift was already underway on the partner side.

I don't think it's a it's a major revelation, we worked very closely with the cloud providers and there are obviously, a very important partner as stephane alluded to each in their own environment, which had a significant sales force and they are looking for ways to bridge between these environments.

Talk to any kind of large enterprise. They are all in on the transition to the cloud. They have a set of systems in data centers that are going to persist for a very long time that connectivity and the fabric for data that spans that's incredibly strategic and important to them and I do think thats, a part of the conversation around data streaming.

<unk> is very strategic because it's what enables them to actually make this move and so it's it's both about.

The shift of open source stuff like Kafka to a managed service as well as the overall story of migration to the cloud and how that plugs into an existing business and so I think both of those are kind of important aspects of what we're doing.

That is great. Thank you.

Is that's more consistent with with the consumption type model.

Opposed to more of a legacy model that would be more focused on traditional billings. So the more.

The cloud becomes a bigger percentage of our new ACB in revenue.

There'll be more of a disparity between billings and short term revenue versus our Apio and <unk>.

And so I guess the last thing I would say is on.

Billings practices in general.

We haven't seen very much change.

And billings requests or anything along those lines.

Things have been relatively stable.

Great. Thanks, Eric. Thank you, we'll take our next question from Michael <unk> with Wells Fargo, followed by Scotiabank.

Hey, there. Thanks I appreciate you taking the question and nice job to everyone.

With the execution here I mean look you're managing your business through a challenging backdrop, maybe Jay you can speak to how you keep the go to market and engineering teams, all focused and moving in the right direction, given all the noise and volatility you've seen since going public and then steffan can you maybe expand on how that informs your approach to the growth margin.

<unk> can trade off and just what underlines the confidence in just the consistent approach to making sure you're taking advantage of the growth opportunity first and foremost here.

Yeah, Hey, Michael Yes.

Yeah look I would say there is no silver bullet the thing I think does help us is as a company we've done some hard things before so we went through a very significant kind of cloud transition.

You would see a lot of that kind of shift happening now, but the work was done earlier on in doing that in a small company is a lot of work and just difficult youre asking people to build and launch a very difficult second product in the middle of the startup taken out to market. I think there is working through are things kind of builds the muscle and then if you're in more difficult.

Times people, who have been through.

Something hard before you've kind of built a little camaraderie around how you go do it there's some resilience there is some.

People are used to it and so I think that helps and I think that kind of built a bit of a core of a team that is ready for some challenges.

Obviously it doesn't help.

Theres kind of friction in the world that doesn't make it easier I think we're lucky to be in a space that just has potential that can.

Outpace that as long as we execute well.

And on the growth and profitability side of the house.

We have been very prescriptive.

Ever since we've been public around we have a growth and profitability framework.

Embarrassed mentioned, we've never been in a company where it spend growth at all costs, we have been always about growth and improving operating margin and.

And we've constructed our internal plan and what we've communicated with Wall Street.

Through the following lens. It is all about making sure that we are adequately invested.

Tackle the $60 billion market that's out there.

While we are also increasing the fundamental drivers of efficiency think about productivity per head thinking about unit economics of cloud. These are projects that are going to be continuing on for probably forever.

And as we've constructed this this model.

Showing the year over year improvement in operating margin.

Is critical for us to demonstrate that we're that we're showing that efficiency and productivity, while still in high growth mode, and we define high growth mode is greater than 30%. So.

This is a framework that we put in place we've been operating against it.

And we're.

We are committed to driving high growth and improving profitability towards the breakeven target of exiting Q4, 'twenty four which as Jay had mentioned.

The 10 year Mark of.

The companys.

The Companys age.

Jeremy Congrats on the results.

Okay. Thanks.

Thanks, Michael we'll take our next question from Nick <unk> with Scotiabank, followed by Barclays.

Yes, great. Thanks, guys.

Maybe one for Jay to start you guys outlined your Tam at the analyst day, and the numbers kind of insinuated that half of the market is kind of at the commercial land and just given you guys don't talk about the lower end of the market as much I was wondering if you guys could maybe elaborate on the strategy there.

How meaningful the commercial segment is two two revenue into bookings and how much of a focus is that portion of the market.

In the medium term versus the larger end of the market.

Yeah, as I said <unk>.

<unk> area for us.

A few years back that was absolutely the worst part of the business and had very low.

Focus internally and as we started to have a low friction cloud product, we realized hey, we could build just really a cloud native motion that would help land companies in that segment and really kind of re imagined that team.

They've got better on every metric right now it's one of the highest performing areas in the company that's newer right, but it's definitely an area, where we are doubling down and kind of disproportionately adding capacity.

We're doing great against their targets.

We think that's really important.

To us it's important to have a mechanism.

Mechanism to capture both breadth and depth right. So that is definitely the larger customers. We do tend to talk about those because people always have the question of like Hey, what is the breadth of depth what could what could a customer be in this space, how much might that spend and so I think there's.

Matt We don't talk as much about how we're going after the broad market I think there it's more about the mechanisms how does the self self service kind of feed into a more transactional early stage sale, how does that kind of grow and expand it turns out a lot of these commercial customers can actually become quite sizable and they move pretty quickly and so.

What start small actually can turn into something pretty reasonable. So we're very excited about that area and it's probably good feedback that we should talk about it more.

Great and then just.

One more you guys have talked about how the cloud marketplaces have been Ah.

Very much successful from a go to market perspective.

Lead Gen perspective.

I guess as we're sort of entering a choppy macro environment, what are sort of the puts and takes there because I guess on one side of the equation.

If there is consolidation of standing from a procurement perspective, maybe that's a tailwind as people are using AWS, you know AWS credits to sort of burn down commits and allocating those the confluent the flip side of the equation, maybe it's a little bit easier to slow consumption or reallocate. Those credits. So is it a chop your macro and sort of your.

Relationship.

With these cloud.

Cloud marketplaces is that more of a tailwind or or is there a little bit of a headwind on there essentially too.

I think it's a tailwind so the way the marketplace has come into play it's a little bit of a lead Gen thing, but the bigger aspect is that.

Companies have significant committed spend with the cloud providers and it is possible to buy products through that through your marketplace.

And so you could think of that committed spend is kind of a shadow budget thats flexible across different things that you could purchase and so if you're in tighter times youre probably.

Optimizing everything in the cloud and it's a really nice way to be able to fit in a new thing like confluent and so yes, we see it as something that reduces friction in the sale for sure. It also provides a great mechanism for cooperation with the cloud providers, but what motivates them is both that marketplace consumption as well as the flow.

If data into all of their other services, which kind of helps drive utilization in consumption and their cloud and so both of those are the things that are going to activate their kind of go to market teams to help and so we think these are great programs, we've leaned heavily into them and then quite successful.

Great. Thanks, Nick.

Our next question from Brian <unk> with Barclays, followed by JMP Securities.

Okay. Thank you two quick question from me.

The interesting thing at the conference was to see the excitement like how.

Messaging and what Youre offering is changing the world.

In light of that like how do you see this at the moment playing out in customer conversations to Chris as macro is getting tougher.

Yes.

And the path of tended to be like the tendency to Steve If you hold for now because you're just keeping the lights on versus also have any pressure to become more real time.

We do some things. So the question is more how are the customer conversations changing now as macro is getting a little bit more choppy and then I had one follow up for Stephane, Yes, Yes, I mean I think the critical question is hey does that excitement persist in times, where there is more economic pressure and what we've seen is yes, absolutely has right on both sides of that like.

We're continuing to grow through more difficult times I think if anything the big change is.

How prevalent is that Tcf side effects right is there a really strong story of how you can displace legacy technologies. How you can get out of this kind of internal operations of open source that can be very costly and then how you can just get more efficient use out of your data and enable the things that you have to do as a business, but now with <unk>.

A little bit of a tighter overall management of budget and I think that we actually have a very compelling story in that area and I think that goes along well with the overall excitement about the area I think that that's now you kind of have to have both of those things to be true about any product area for it to continue to succeed in the current environment.

And then Stefan SD more question on the investment so as you guys doing more cloud.

What does it do in terms of investment levels, and sales and marketing et cetera going forward.

This cloud in the wave one beauty of clouds as increases visibility for you in terms of you see what the customer is doing you see how we should be and does that kind of trigger lock could differ.

Different investment in sales and marketing is it can you do more with less like how to think about that dynamic. Thank you.

Okay.

As we look at the investment profile for sales and marketing.

We are definitely leaning into the <unk>.

Mix shift that we're seeing testing or driven by our customers, where it's more cloud oriented.

We have a customer growth go to market journey, where we have these five stages.

Ultimately with getting to the central nervous system, and so along the way of that journey.

We are doing from a sales and marketing standpoint is making sure that we.

We have the right model in place around number of account executives and systems engineers and customer success people on.

And the cloud business when we segmented.

And we look at at the commercial business. The commercial business is a 100% cloud that business is growing.

Very healthily and then we look at the enterprise business, which is which is growing healthily too, but we see more hybrid opportunities in the enterprise business, where they have existing console and platform deals and we're looking to upsell and cross sell.

<unk>.

Into those existing customers, where they can be adopting costello on cloud. So when you net it all out what we're looking at is we're looking at a more efficient go to market structure, our sales and marketing with the shift to cloud.

Because a lot of it is expansion selling.

And we feel like it's a good setup as we look to get more leverage out of sales and marketing over time.

Okay.

A big part of that just to tag on is look the ability to drive kind of a product led growth in adoption and then expansion with software. In addition to excellent field sales team is just not that easy to do on premise.

It is hard to get net new data system stood up on premise you got to hire people you have to order servers, there's no way to just do it with software in.

In the cloud that's totally different so our ability to kind of augment what that team does make our.

Before like more efficient in everything they do and how they work with customers is just so much better as well as our data about how thats progressing and our ability to be smart and targeted in what we do and so yes, that's kind of where that efficiency comes from now obviously theres some investments to get all those parts built and strung together, we've talked a little bit about how we're trying to orchestrate that journey, but yes.

I think it's a huge ability to amplify what youre doing with humans and really be intelligent and direct it well to drive efficient growth.

Congrats thank you.

Alright, our next question will come from Patrick <unk> with JMP Securities.

Great. Thanks, Jay and let me add my congratulations.

So Jack.

Okay.

Bob an hour ago, you announced a new chief customer officer, Chris I guess and I was looking at the background is actually seem really similar.

Alright, so I'm just wondering what yes.

But what what whats the rest yes, yes. They know each other this is a planned transition so we feel really good about it.

The basically Roger stepping back and we were looking for who would be good to step into it and we're really excited about right. So I think it's not some evolution of the team and we're excited about what are the odds right.

Alright, and then my follow up is in it.

Lots of people have this issue, but with the stock having gone from the nineties 22 that that makes sense.

Retention harder, but what are you guys doing what what's your message to people and is there anything you can do to offset the pressure that comes from having the equity to do that.

Yes, well I mean look it was a turbulent time for us to go public.

Big run up and then some follow up.

Sure.

I think the employee base, we have has been through a number of things that were difficult and so.

We're kind of in it for the long haul there is a huge opportunity here people are excited about it we did do some small things to try and help so Stefan talks about the fact that we kind of split the bonus payout. We felt like that was a cost efficient way of trying to give people something a little earlier. So what would have been a payout in Q1, we split into two payments and gave the first one upfront so that it.

Wasn't kind of a cushion some of it.

And I think that helps that was extremely well received so.

I think we're in a good state with.

Our employees and.

<unk> also gotten much easier to hire new people and growth because it's a more difficult economy. So I guess that's it.

The silver lining in it.

The other thing I'd tag on is.

As you think about our demonstrated ability to deliver on our commitments.

That is very important as all of the employees, including everyone. On this call. We all have goals and objectives that we're trying to accomplish each quarter.

And those get boiled up into how we how we guide the street, how we how we execute and as the level of execution. Since we've been public has been a big bright spot for employees because people are delivering on their commitments and a very tough environment.

Things are going on in the macro and the volatility in the stock market. There are some things that are outside of our control, but what we can control is our execution and that has been really stellar in a very volatile environment and I think that is that that provides some comfort to the employee base as well.

Yes, I Couldnt have said it better.

Alright that concludes today's earnings call. Thanks, again, everyone for joining US we'll talk soon take care. Thank you all.

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Women.

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