Q4 2022 Confluent Inc Earnings Call
Despite the difficulty of the change the resulting efficiency allows us to pull in our target of non-GAAP operating margin breakeven by 12 months.
This means that exiting Q4 of this year, we will have shown a 41 point increase in non-GAAP operating margin in just 24 months.
<unk> 2023 less than one year from now we will be a market leader in a deeply strategic space operating a profitable business and driving sustained high growth and a very large market.
This market leadership is driven by our platform differentiation and the significant tcl advantages, we deliver to our customers to better illustrate that let me share our customer story.
<unk> is the leading website development platform in the world, which in turn serves around 1 billion unique visitors. Each month data streaming is at the heart of many of the digital experiences to their clients create from online bookings to e-commerce to personalized content and wix as data streaming journey like so many others began with open source Kafka. They quickly discovered however that the <unk>.
<unk> source approach required heavy Dev ops resourcing and resulted in challenges with scale time to market liability and latency ultimately they chose confluent cloud to mitigate risk reduce costs and increase productivity that.
That migration quickly resulted in a 90% ROI.
This is just one of many examples that shows the strength and the underlying demand for our data streaming platform. This is because confluence service operational workloads that are directly responsible for driving the core operations of our customers, making this a key element their digital strategy going forward in fact, IDC predicts that by 2025, Vince streaming technologies will be.
Used by 90% of the global 1000 to deliver real time intelligence to improve outcomes, such as customer experience and in a separate study IDC found that of the companies that are currently using streaming data over 80% have plans to invest in new streaming capabilities in the next 12 months to 18 months.
Today, our product is the category leader in data streaming platform technology bar, none the key focus for US is ensuring we continue to stay ahead as this category grows and evolves one critical element of these investments and I want to discuss today stream processing that is technology to enable our customers to build applications on top of the real time data streams that confluence.
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A simple way to understand the importance of stream processing is by analogy to the world of data abreast and traditional databases.
Database solves two problems it acts as a store of data and executes quarries that process. The data. This combination of data and processing is what makes databases, so easy and ubiquitous.
Similar combination of capabilities as needed as we move from data at rest to data in motion and the world of data and motion data isn't just Stuart it's a continual stream that updates as the world changes the natural complement to this stream processing that is building applications that continuously update react or respond to changes in the world the core of Kafka.
Acts to store these streams and to be a hub for connectivity kind of like a central nervous system that transmits real time impulses of what's happening in the business.
Stream processing acts a bit like the brain, taking real time action on the impulses. The nervous system can base increasingly businesses of all kinds are leveraging stream processing to drive the data driven applications that better serve customers and drive intelligence and efficiency in their operations.
Confluence long contributed to the emerging stream processing ecosystem around Kafka with Kafka streams and application development library for stream processing and case equal.
This quarter, we took a major step in furthering these capabilities with the acquisition of <unk> a stream processing company that offers a fully managed service for the open source project Apache Flink, Iraq has joined confluent to help us out a fully managed blink offering to complement cloud. This is a very exciting step for comparability and I want to explain a little bit about our strategy in this area.
We've watched the excitement around slink grow for years and saw it gaining adoption among many of the most sophisticated technology companies in the world, including City Goldman Sachs interest linked in Netflix Uber and Apple. This popularity has been driven by a rich feature set including a powerful processing model that generalize this batch and stream.
Assessing.
It is battle tested at scale on some of the largest real time processing workloads on the planet and perhaps most importantly, it hasnt incredibly smart innovative community driving it forward.
In short, we believe that flank is the future of stream processing and by adding it to confluent cloud, we can significantly advance our data streaming platform and help our customers get even more value from their data streams in.
In terms of our product plans, we plan to launch the first version of our flink offering in confluence cloud later this year, we want to follow the same key principles, we brought to our cost offering building a service that is truly cloud native is a complete and fully integrated offering and is available everywhere across all the major clouds. We think this combination of an open popular interface offered with <unk>.
<unk> differentiated cloud native core is the key to success for cloud data systems.
Think that over time this offering can be a substantial driver of growth in our business comparable in size to cockpit itself.
Adding this new offering will allow us to better monetize the compute and application development around data streams. In addition to the core stream data expanding spend of existing customers further by making streaming easier we pull more workloads into our streaming platform. In addition, the processing of streams generates more streams, helping to accelerate the growth of our <unk>.
Kafka connector and data governance products and this waste stream processing accelerates consumption and a multiplicative fashion, which we think will be a very positive tailwind for growth as these capabilities come to maturity.
To help execute both this initiative as well as our overall product strategy I am pleased to announce that Sean <unk> joined constantly last quarter as our chief product Officer, Sean joins us from <unk>, where he served as CTO and before that Atlassian, where he served as head of growth Sean as a technologist passionate about this space and is the right person to lead the team through the data.
<unk>.
And finally, I'd like to share that Larry shirts to step down from his role as Chief revenue Officer, Larry We wish you all the best and thank you for your many contributions in helping us scale and evolve our sales team, we will not be looking to backfill. This role Larry reported Erica Schultz, our president of field operations, and we will revert to a prior org structure with Erika managing but.
Theater sales leaders directly.
In closing the demand for data streaming remains strong we've accelerated our plan to become profitable by the end of the year and we'll continue to invest in building the data streaming platform that will become the central nervous system with every company and with that I'll turn the call over to Stephen to walk through the financials.
Thanks, Jay Good afternoon, everyone I'd like to start with a brief recap of the full year results and fiscal year 2022, we accomplished our stated goals of driving high revenue growth and improving annual operating margin.
Total revenue grew 51% to $585 9 million.
<unk> cloud revenue grew 124% to $211 2 million with substantially improved unit economics, and operating margin improved 11 points.
Like to take a moment to thank all of our team members at confluent, our customers and partners for their contributions throughout the year.
Turning to the fourth quarter as Jay mentioned the results exceeded the high end of our guidance on all metrics highlighted by strong revenue growth comp loan cloud momentum robust customer additions and substantial margin improvements. These results are a testament to the mission critical and strategic role of our data streaming platform and our proven ability to drive.
High growth, while improving efficiencies and profitability in a challenging economic environment.
Our <unk> for the fourth quarter grew 48% to $747 million.
Current RPI estimated to be 62% of RPM was approximately $456 2 million up 43%.
Both metrics were lighter than we expected in addition to what Jay discussed earlier, we saw less urgency by customers to sign deals in the last couple of weeks than we typically would see in a calendar Q4, primarily in our enterprise business as some customers evaluated macro and opted to delay their purchases to FY2023.
We didn't see any material changes in discounting contract duration, our win rates relative to the previous quarter and I am pleased to report that a number of these Q4 push deals have closed in Q1, which points to the underlying demand for our solution.
Dollar based net retention rate in the quarter was also healthy just under 130%.
And our our for cloud and hybrid where both comfortably above 130% with hybrid and are continuing to be the highest.
Gross retention rate remained strong and was above 90%, reflecting the strength of our product differentiation and tcl advantages against alternative solutions, including open source Kafka new customer.
<unk> additions continued to rebound since our paywall removal in March.
We added 290 net new customers during the quarter ending at approximately 4530 total customers up 31%.
New customer additions were driven by console in cloud.
The growth in our large customer base was also robust we added a record 70 customers with 100 care more than <unk> in the quarter, bringing the total to 991 customers up 35%.
These large customers contributed more than 85% of total revenue.
We also had a record quarter of customers with $1 million or more in <unk>, adding 20 customers during the quarter, an all time high bringing the total to 133 customers up 51%.
And we ended FY 'twenty, two more than doubling our $5 million plus our customers from a year ago, including a growing number of $10 million plus our customers turning to revenue.
Total revenue grew 41% to $168 7 million subscription.
<unk> revenue grew 44% to $155 3 million and accounted for 92% of total revenue.
<unk> cloud as a percentage of new ACD bookings was greater than 70% in Q4, which represented our fifth consecutive quarter of cloud exceeding 50% of total new ACB bookings.
As cloud accounts for a larger share of new ACD bookings cop, one platform will have lower ACB and less upfront revenue.
This upfront dynamic was reflected in complement platform revenue, which was $87 million up 17% and accounted for 52% of total revenue <unk> cloud revenue was $68 4 million up 102% and accounted for 41% of total revenue compared to 28% revenue a year ago.
This translates to a record sequential revenue out of $11 5 million for comparable in cloud compared to $9 9 million last quarter and $7 million a year ago, our comparable cloud momentum was driven by our continued focus on the use case expansion decreasing time to value for customers and supporting their mission critical workloads with strong consumption across industry.
Articles.
Turning to the geographic mix of revenue revenue from the U S grew 35% to $100 5 million revenue from outside the U S grew 50% to $68 2 million move.
Moving on to margins I'll be referring to non-GAAP results unless stated otherwise.
Total gross margin was 73% and subscription gross margin was 78, 7%.
The unit economics of our cloud offering continued to improve driving another quarter of healthy gross margin. Despite a continued revenue mix shift to comparable in cloud.
Moving forward, we anticipate total gross margin to fluctuate between 70 and 72%.
Turning to profitability and cash flow operating margin improved 20 percentage points to negative 21, 5%.
Through proactive expense management productivity and efficiency initiatives.
And a disciplined investment approach we drove improvement in every category of the P&L with the most pronounced progress made in sales and marketing improving eight percentage points in gross margin improving five percentage points.
Net loss per share was negative <unk> <unk>.
Using $286 7 million basic and diluted weighted average shares outstanding free cash flow margin improved four percentage points to negative 18, 3% and we ended the fourth quarter with $1 nine $3 billion in cash cash equivalents and marketable securities turning now to the <unk> acquisition <unk> is a pre revenue company and will be absorbed.
The company into our engineering team.
We closed the acquisition in Q1, and we expect no material impact on our financials in FY2023.
The additional expenses have been incorporated in our guidance.
Looking forward to FY2023 as Jay discussed earlier, we've made a decision to accelerate our path to profitability by one year from Q4 'twenty four to Q4 23, while Resourcing the company to deliver approximately 30% annual revenue growth rate in 2023 over the last two years, we've made significant and prudent investments.
And the business as we address our $60 billion market.
We've more than doubled our company head count.
Accurately than managing the growth rate of spend and has trended down from 68% in FY 'twenty, 1% to 39% in FY 'twenty, two and it's expected to go down to approximately 15% in FY2023 we're seeing strong returns on our investments as we continue to grow our market share and extend our product lead with a highly differentiated platform.
On the go to market side, 50% of our sales reps are now fully ramped and we expect the mix to be in the range of 55% to 60% exiting this year. Additionally, compared to last year, we have improved visibility into our FY2023 revenue streams as approximately 60% of revenue comes from current RP O coupled with the strong growth in 100 <unk>.
Plus our customers, which contribute more than 85% of revenue each quarter.
In our <unk> remained very healthy just under 130% which supports our growth.
Given this backdrop, we believe accelerating our path to profitability by one year, while continuing to deliver high growth as the optimal decision, especially as companies are now operating in an environment of high interest rates and macro uncertainty now I will turn to our outlook.
We believe our guidance appropriately incorporates both the macro challenges, we see in the market and the impact of budget scrutiny as a new norm, which elongate our deal cycles and all customer accounts across geographies.
For the first quarter of 2023, we expect revenue to be in the range of $166 million to $168 million representing growth of 32% to 33%.
Comp loan cloud sequential revenue add to be approximately $5 million.
As we expected there was a decline in sequential add relative to Q4 and is consistent with what we've seen in prior years.
Similar to last year, we expect cloud sequential revenue add to increase every quarter with a more pronounced increase in the second half of the year.
Exiting Q4, 'twenty three we expect cloud to reach the milestone of approximately 50% of total revenue.
We expect non-GAAP operating margin to be approximately negative, 27% and non-GAAP net loss per share to be in the range of negative <unk> 15 to negative 13 using.
Using approximately 290 million weighted average shares outstanding.
For the full year 2023, we expect revenue to be in the range of $760 million to $765 million representing growth of 30% to 31% non-GAAP operating margin to be approximately negative 15 to negative 14% and non-GAAP net loss per share in the range of negative 28 to.
To negative 22, using approximately 297 million weighted average shares outstanding.
As discussed earlier, we're now targeting to exit Q4, 2023 with breakeven non-GAAP operating margin.
We also expect the timing of breakeven free cash flow margin to roughly mirror that of our operating margin.
With the exception of more pronounced seasonality in Q1 of FY2023 primarily due to our corporate bonus program and one time charges associated with our restructuring.
Finally, we will continue to actively manage share count and stock dilution and on an annualized net dilution basis, we're driving net dilution from four 7% in FY 'twenty, 2% to 3% to 4% for FY2023 are.
Our goal over the long term is to bring that dilution down even further.
In closing, we've established a proven track record of delivering on our financial commitments and both stable and uncertain economic environments with our leading data streaming platform and a unique go to market model. That's showing increased leverage we believe we are well positioned to capture our large market opportunity ahead.
Looking forward, we're confident in our ability to drive another year of high revenue growth as we March towards non-GAAP operating margin breakeven exiting Q4, FY2023.
Now Jane I will take your questions.
Thanks, Stephanie joined the Q&A. Please raise your hand on June when Youre selected mixture on mute and turn on your video <unk>.
We'll now pause a few moments to assemble the <unk> roster.
And today, our first question will come from Sanjay <unk> with Morgan Stanley followed by William Blair.
Please go ahead.
Thank you Shane.
Thank you for.
Pleasingly in.
I guess my first question and Jay I think you addressed this in your formal comments just around some of the elongation in sort of sort of the sales cycles that you saw at the end of December .
Is there any other.
Is there any sort of other patterns that you would sort of call out whether it's more of the conflict cloud side of the house versus console platform any sort of market segments industry segments on that.
Were notably weaker than expected or was this kind of more of an across the board dynamic around budget scrutiny that you saw on like the deals in Q4, yes.
Yeah, Hey, Sanjay its great question.
Yes.
The most pronounced thing for US was it seemed to mostly impact the enterprise segment of our business. The commercial segment didn't really feel it.
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It was across geographies. So previously I would say it was more pronounced in EMEA and APAC. We also saw impact in the Americas.
So beyond that it was probably the larger transactions tend to feel I think a little more pressure scrutiny et cetera.
Kind of as you would expect so nothing beyond that I Wouldnt say that theres, a strong industry pattern I wouldn't say that there was much beyond that that would.
Really show it we were pleased that gross retention was really strong.
Yet again.
Difficult environment, and we saw no meaningful impact there, but it did slow down some of the expansions as well as some of the new lands.
And then so if I could just sort of connect the dots on the financials.
Cloud revenue in Q4 was.
Excellent.
Good quarter for public cloud revenue. The IPO was certainly weaker and then when I look at the 2023 guidance revenue guidance. It only came down I think $5 million of sort of narrow that narrowed the range.
What gives you confidence that like the revenue sort of set at sort of the right right level just given some of the.
The dynamics Youre seeing.
And the macro.
Well, we took into consideration our current outlook on the macro and we really focus on a few things. One is our current RP O exiting Q4 gives us about 60% visibility to our total revenue number.
In FY 'twenty, three which is actually five points higher visibility than we had this time last year.
We also have more proportionally.
Sales reps that are fully ramped.
And are ramping and we see that growing out throughout the year and then lastly.
We just came off of a quarter, where we saw very robust growth at 100, K plus customers in million dollar plus customers and those cohorts contribute north of 85% of revenues and so we have the right product for the right market and we feel like 23 will be it will be a decent setup for us.
Understood. Thank you Stephanie.
Thanks, Sanjay we will take our next question from Jason Ader with William Blair, followed by Deutsche Bank, Jason Yes.
Yes, thanks Shane.
Good afternoon, everyone.
Obviously macro issues are affecting everyone.
You guys I don't want to talk about sales execution Lares, leaving I know some other folks are leaving and then you'll have this reduction in force.
How much is sales execution has been a contributing factor to the performance.
And if there are any issues what are you doing to address those and then I have a quick follow up.
Yes, I think the bulk of what we're seeing is very different macro environment than what we were operating in call. It whatever nine months ago.
That obviously reveals opportunities for improvement.
I think the bulk of what's changed is that.
Okay, and then I had a quick follow up for you Jay.
What are you seeing something in deals where it was increasingly clear that you needed a flank.
Solution.
Yes, there wasn't anything where it was like preventing us from winning if that if that's kind of what youre getting at where it's I got we can't land to this customer without this we feel like stream processing is incredibly important strategically over the long term. So it wasn't it wasn't like a defensive move like Oh, if we don't have this we're not going to be able to continue.
Growing based on Costco, we're not going to be able to continue winning customers.
What we felt was hey, there is an opportunity to go after something that could be as big as Kafka and has a very similar trajectory has an extremely high attach rate to kafka itself and fits into our kind of overall vision.
And where we could get really some of the key people who had helped drive it forward.
Part of the company and that was kind of too good to pass up even in a tighter environment, where we're being thoughtful about each dollar.
Thank you.
Alright, Thanks, Jason we'll go to Ryan <unk> with Barclays first will come back with Deutsche <unk> go ahead.
For squeezing me in.
Follow.
A follow on there would be a little bit like you're all trying to get to the bottom of the same story. If you think about what you are selling it's very mission critical like.
Corporate projects that don't do this for fun, but I also realize it's fine.
And then the.
In your conversation with clients about like that need that urgency to do things that I had one follow up for Stephane.
Yes, yes.
Think that one of the things that is really an asset to us in times like that this is exactly what you said right and I think that shows up in the gross retention I think for US. It's also showed up in the consumption like we've seen consumption against commitments track really well. So the projects are going forward people are kind of getting the value out of it.
But I think each of these projects now gets more scrutiny and that's that is a drag on doing business and it shows up in a bunch of different ways.
Whether thats pressure on kind of analysis of Tcl and RLI, whether it's kind of the shift of projects around within organizations. I think companies are just putting more scrutiny on everything they're doing and that impacts us, but yes, I think it's a huge asset to serve production use cases, which are in some sense of dirt.
Part of how the company.
Gross operates makes more money and I think that's one of the good things about the streaming area.
And then one quick follow up on.
Our numbers so we can think about the.
You've kind of moved the profitability goal one year forward I was just kind of a big big change and it takes a lot of effort from the organization can you just talk a little bit about the compromises you have to think about there with that certain growth projects.
Maybe kind of emphasize it doesn't sound like it's the theater that's getting impacted.
Just talk a little bit about the puts and takes you have to kind of go through to get to that because thats quite a big effort. Thank you, yes, yes, I mean any change like this is a little bit disruptive and so I think that's probably the biggest impact for US is just making sure that we get off to a fast start at the beginning of the year, we're not so disrupted that that impacts execution.
It's obviously also just a harder thing to go through we felt like look after a couple of years of very fast growth, where we can kind of roughly double head count that time period, there was opportunities for efficiency right and despite being very thoughtful in planning and where we're deploying resources. We thought there was opportunities to get more efficient.
So for US it was kind of a question of how do you do that you're going to do it more slowly kind of in place are you going to do it more quickly as we got I think a better read on just hey, whats the environment for 'twenty three what's the environment overall in tech what makes sense for us we felt like it made sense to do it more quickly and.
That kind of.
I think shows a little bit of what's possible.
For the business in terms of efficiency or is at least one good step in that direction and it seemed like in the environment. It just made sense to do that now.
And we're also doing it preserving our ability to drive topline growth.
<unk> continued to invest in.
Our innovation engine and we're able to balance the the moves that we made to preserve our long term sustainable competitive advantage.
Yes, I think thats exactly right I mean, as we went into this the kind of key analysis is.
Would you have to give up on something that is going to make the company great whether that's in the development of the product or how we're growing the business, how we're kind of capturing the opportunity and we felt like we could do it without doing that and I think that was one of the big.
One of the big things that was necessary for us to act on.
Okay. Thank you.
Alright, Thanks, Raimo, we will take our next question from Brian <unk> with Deutsche Bank, followed by Bank of America, Alright, great. Thank you. So much it's nice to see you all.
I've got one question for.
I guess first for you J J, just as we think about that.
The changes that you've made and you've got Larry moving on.
What is it that gets you comfortable that theres not risks exiting this year with 55% to 60% sales rep productivity and it might inspire some additional unanticipated turnover and then I've got a follow up.
Yes, I think we continue to have a kind of steady hand running the go to market organization. So Erica Schultz has run the larger field organization Larry reported into her she previously directly managed the three sales theater V piece and has kind of taken the moca directly and so actually I feel like in a time.
Where there's like a fair amount of macroeconomic uncertainty.
Uncertainty that org structure is actually good you're going to have kind of a short path between leadership and what's happening out there.
So I feel pretty good about that okay. That's good enough and maybe just for you Stephane I'm just trying to reconcile console and cloud Q1 guidance versus the really strong result, coming off of in Q4 is there any reason to think that consumption was perhaps unusually strong in Q4 in some way that might not repeat.
And or are there any reasons to be more concerned and conservative about consumption rates in Q1.
Well the dynamic that we called out.
Relative to Q4 to Q1.
Net sequential add as is lower in Q1 and Q4 is a natural.
Natural dynamics that happens in consumption models, you look kind of across the board.
At companies in our peer group you see similar fact patterns.
We did see a very strong Q4.
It candidly came in higher than we expected and that goes back to the mission criticality and the and what we are.
What we're driving in terms of consumption for our customers and the value that we're driving.
When we look at the.
The progression for cloud throughout the year, we are looking at seeing increased sequential net adds throughout the year post Q1, and four are comparable in cloud exiting Q4 to be.
Roughly 50% of total revenues and so we're doing all of that and in an environment that is just it.
It's just more challenged to do business and so we've reflected all of that in our guide both in our total revenue guide and our cloud guide.
And where we're adding effectively the same amount of revenue that we did.
Q1 of last year, and Q1 of last year that environment was a lot different than where it was Q1 of this year is so.
Nothing to be concerned about we're looking at incredibly high growth rates for <unk> cloud.
For the year and that continues to show that continue to show up in our numbers.
And just to just to pile on that one.
One of the aspects we talked about this last year. When we were in Q1, one of the aspects that leads to this.
Just the kind of lifecycle of software projects they tend to get funded at whatever the company's beginning of the year is in developed and then kind of rollout and so obviously there is expansion in consumption happening throughout the year, but it is more things more new things come out.
In call it whatever Q3.
And then a little bit less at the beginning of the year I was kind of the new things are getting built and so you would see this I think we're like a mongo DB and some other companies as well as a little bit of that pattern.
Alright got it thanks guys.
Thank you Brad we will take our next question from Brad Sills with Bank of America, followed by Piper Sandler.
Great. Thanks, Jay and good to see you all.
Question for you Jay or Stephane.
Just investment priorities. Obviously, you are saying that this reduction will not affect those strategic investment areas I think at the analyst day, you had outlined security data compliance enterprise just any update on those cycles. What how does this change that at all or are those still very much the focus areas.
Yeah, absolutely so like on the product development side. There is no change there wasn't there wasn't a big product area that would be cut or stop developing we're able to maintain the major investments that we had with the with what we planned for this year and those cuts taken into account.
This did cut across different areas of the company and Theres a number of factors that were included in kind of making cuts, but our priority as I said was kind of.
Really making sure that we had full funding for what we considered the kind of key strategic priorities. Both on the product side and on the go to market side and in terms of markets. We wanted to get into that we wanted to drive growth. Both for this year, but also for setting ourselves up coming into next year and beyond.
Great. Thanks, So yeah, no major change.
No thats great. Thank you and then one on confluence cloud please.
Existing the year at 50% just a tremendous trajectory I think in fiscal 'twenty you exited the year at 15%. So just a remarkable result, there on the cloud if you could just articulate for US why have you seen such success in the cloud what is it about confluent cloud.
Versus say other categories, where we've seen perhaps a slower ramp in public cloud infrastructure. In these types of mission critical workloads that you guys are supporting.
Yeah, I think that one of the things Thats easy to Miss is how.
How high the bar is for a cloud product and so if you look at our investment you would have seen a similar pattern, where you're like hey, they're putting a lot of work into this thing and it's driving some strong question.
So we are doing that for many many years and.
The reason for that is that this kind of cloud infrastructure like a lot of the iceberg is below the water and until you kind of meet.
Certain minimum criteria in terms of security and scalability and operations and availability in different clouds around the world. It's just very hard to capture the market and so coming into an area. That's a big wall to climb once youre on the other side of the wall. Then it protects you I think from competition, who make them up in <unk>.
Do the same thing so I think it's I think it's been a great thing for us, but yes. It was I think just kind of reaching that critical thresholds and then in terms of how we operated that led to that I would say it was mostly just full commitment like we.
The myself some of the other people who founded the company have joined earlier had a background in running kind of.
Data systems internally as a service and we just kind of knew that that was going to be the model in the public cloud that there was no future for licensed software as the delivery model. Once people have access to these kind of cloud services. So we knew it was kind of do or die on the conversion and so we've leaned in early on in a very significant way where really the whole.
Engineering team moved to that every cloud metric was kind of elevated in importance to match.
A much larger number.
On the software side of the business and really kind of held to that internally, even though we're really pushing one part of the business up and I think that was necessary early on it's very hard to get what's effectively a very different product going in an early company.
Because you have to effectively build two successful products. So I think that helped us kind of get it to that.
Whatever escape velocity, where it could then kind of grow and capture a lot of the opportunity that was I think always there for folks operating in the cloud.
Thanks, a lot of sense, great to see thanks Jay.
Alright, well take our next question from Matt Owens with Piper Sandler followed by Guggenheim.
Thanks, Shane and good afternoon everybody.
Obviously seeing pressure worldwide here, but just curious if there was anything unique to call out positive or negative from the various theatres mature all participating in.
Yes, it's mostly what I described the biggest unexpected.
Unexploited thing for US has been just the continued strength for us of the commercial business.
We kind of described that is the fact that we think we're just.
Still severely underpenetrated in that segment, so even though I think they are also fueling lots of pressure theres just lots of opportunities and I think it's also has very good product market fit with our cloud offering and so it's been nice to see that continue to grow because it was a part of the business. We are very excited about.
Coming into this year and it's nice to see its continued growth.
But beyond that yes, it was across different industries.
That we saw pressure we were pleased to see that like by and large we're not losing deals.
They are delayed they go through more scrutiny. They may slip out of the quarter, but a lot of the things that we saw delayed in previous quarters did close.
Either in Q4 or in the first part of Q1 and so we've been we've been excited to see that it just exerts pressure.
Great and then Jay I know entering Covid you saw a few customers that should revert back to an open source solution and then come back to.
Confluence and in your prepared remarks, you talked about it requiring heavy Dev ops resourcing, so as we're seeing.
Mobile recession happened are you seeing customers actually choose open source as a viable alternative at this point or is that kind of past behavior more so in the past.
Yes, it's past behavior, so we've been that.
That was a concern many people had and the feeling was hey, it must be cheaper just to use the open source, but one of the really important things to understand about this area. As these cloud services are not like a premium offering of the open source. It is actually more expensive to hire a team of engineers to operate this stuff. It is.
More expensive in terms of people, it's more expensive in terms of cloud infrastructure.
Takes longer it's just more and so for that reason once you have a really good cloud offering.
Not very appealing to downgrade and less for whatever reason the customers not like actually succeeded with it are somehow not getting the value.
But.
Just based on the kind of basic Tcl the two things it should be a big win and.
We've been pleased to see that actually play out in practice.
That was the theory early on as we had I think a pretty immature cloud offering we didn't always see that we did see some customer losses earlier as there was pressure we felt like we were in a very different.
Situation as we were kind of coming into harder times this year.
And we talked about that on these calls, but it's been nice to see that play out that we haven't seen the kind of <unk>.
Turns.
And all of the same magnitude in fact gross retention has held very steady throughout this.
Alright.
Our next question from Howard <unk> with Guggenheim followed by Colin.
Great. Thanks Shannon.
So my question is for is for either Jay or Stephan. It's a clarifying question about J a comment that you made in your prepared remarks about near term spend rationalization not impacting comp with long term growth opportunity because it seems like so cloud is holding strong.
In your response to an earlier question you said rationalization. It was really about optimizing operational efficiencies that you identified but not necessarily impacting growth. So.
So despite being pulled forward profit target is.
Is your baseline growth assumption over the mid term now isn't necessarily lower than before or.
Could there still be a scenario, where your midterm growth expectations are unchanged.
Just figured out how to do it more profitably.
I definitely think that there is an aspect of us just figuring out.
How to do things more efficiently and we.
Willingness to make adjustments faster in that respect.
Theres, obviously areas, where there is tradeoffs and so there is nothing in life is pretty good.
But yes, we felt that we were able to make this change without significantly changing now I would say look there is something impacting growth, which is we are in a macroeconomic environment, that's very different from a year ago.
That's a headwind and so I think when we were considering what we were going to do on the expense side. We were taking into account that we were going to be facing this headwind and likely.
Slower than we would be if that was not the environment that we're operating in.
Okay. Thanks, I just have a quick follow up for steffan on the platform side.
I forget if you've mentioned this in your prepared remarks, but if.
I might have missed it but was there any notable change in contract duration on the platform side that resulted in lesser license revenue recognition.
Then in prior quarters.
Also is there any migration from platform to cloud that's worth calling out thank you.
Thanks Howard.
There's no material change in contract duration, but what youre seeing drive.
The change in license revenue is really the profile of new ACD, that's coming in the door.
And the new ACB is comparable in cloud.
Very very healthy this quarter and.
And we saw just less less new platform deals come in because the industry is all heading towards cloud with that said Commvault platform is still an important part of our portfolio.
And and we're going to continue to see contribution from.
<unk> platform, but it is it's really about <unk>.
Cloud is the story here and.
And even going back to.
Our Pryor.
Comment that was made even in a tougher macro environment. We just came off of a quarter, where we posted record cloud sequential growth and we're calling for very meaningful cloud.
Expansion over over 2023.
Back to the Testament of the value that we're delivering in our compound cloud model.
Great. Thanks, guys.
Thank you.
Alright, well take our next question from Derrick Wood with Cowen followed by Wells Fargo.
Great. Thanks for taking my question. So I guess first Jay I wanted to touch on the <unk> acquisition what is what.
What is the link excel at that improves upon the capabilities.
Copco streams or case equal DB.
How should we think about maybe the R&D shift as you bring Apache point, Dan or there are some technologies, you'll look to deemphasize going forward or.
Or what's the balance across the stream processing technologies that you have yeah. Yeah. It's a great question. So yes kafka streams is effectively it's a kind of application development library that helps you do stream processing with cockpit. So it's very easy to use embedded applications. It tends to serve more kind of micro service use cases.
What flink brings to the table.
Is I think really the most complete well thought out.
Framework for stream processing it generalizes.
<unk> processing with realtime streaming so you can kind of run thing something at a point in time, and then have it keep running up into the future.
<unk> supports a variety of programming languages, So Python jamba.
Cool.
It has probably the best scalability and performance. It has I think the most active community.
So there's really a whole set of things that are brought together.
Including the sophistication of the types of processing applications that supports it.
And all of that together.
Just feel like it's really does add.
Beyond what we were able to do with cough extremes in case equal and is kind of worth the investment.
It doesn't change our support for those technologies.
As with any cloud service will continue to.
Help customers with those really indefinitely.
<unk> streams in particular has a nice kind of area as our embedded library for customers, but we do see this as very much the future of stream processing and kind of the technology of choice for customers over time.
Got it.
Couple of quick ones for you Stephane.
On the restructuring side can you just give us a sense as to where the cuts are coming from.
In particular, I guess it would be.
Nice to know kind of like post restructuring, what what kind of growth you have in quota carrying sales headcount kind of year over year, and and how youre thinking about given given the longer sales cycle, how youre thinking about the glide path for net revenue retention in 2023.
While the restructuring was.
What was done with with the lens of preserving our ability to continue to grow in high growth mode.
And really getting to the efficiencies that we think that we can get to and and so what does that mean, we're looking at and sales and marketing we did have.
From a head count standpoint, the most impact there, but those are primarily like non quota carrying folks.
We also took a look at <unk>.
G&A and then lastly, I would say R&D.
But we were very much focused on ensuring that all of the decisions, we made or in the preservation of us continuing to have high growth with with improving profitability and efficiency and one of the things that we mentioned earlier was.
If you look at the last couple of years, we have made very meaningful investments.
Across the board in support of Us growing into what is a very meaningful company in a very large market and there is always an opportunity to rationalize.
And get more efficient so that's the theme that we have this year is as efficient and profitable growth.
And that's what we're driving towards.
I'm sorry, lower at the other couple of questions.
Just the other line was the glide path of net revenue retention rate as we see longer sales cycles continue.
So.
Our our network our net retention rate this quarter came in just a shade below $1 30.
We gave a little bit of color commentary.
That.
Colorful and cloud and our hybrid customers were north of 130.
We continue to see very strong progress with those two.
Products and customer sets.
As we think about the glide path over time.
Very clear about being above $1 25 for a total company standpoint.
And also looking at just higher net retention rates for our cloud and our hybrid customers is that.
Like where the puck is going.
Great. Thanks, guys alright. Thank you we will go to pendulum borrowing with JP Morgan first.
Hey, guys.
Hey, Thanks for taking the questions two quick ones, maybe I'll beat us on just the customer behavior going into January so far towards the end of January is a deteriorating kind of stable.
You did mentioned and you've closed a few deals and was just wondering.
Yes, yes.
Okay.
Results in January so far have been in line with the plan, we put together for the quarter and guidance. So we've been pleased to see that play out as we hoped.
Got it.
And great to see the acceleration.
To get to breakeven I wanted to ask I think it was doing the math was about $55 million in terms of cost coming down I believe I was trying to understand how much of that is driven by the ramp how much of that is kind of optimization of discretionary spend that you've talked about how much of that is kind of real estate I would think that real estate optimization <unk> take time.
Those mix and then I guess, how should we think of that profitability going forward.
Yeah, Yeah. So it's definitely a mixture of all those things we haven't broken out exactly how much is <unk>.
To the extent, but yes, absolutely we're kind of optimizing real estate footprint, just kind of post COVID-19, we have a better idea of what we actually need.
We had already planned for the year prior to this action that would have shown very meaningful.
Operating margin improvement and then this is kind of.
Added on top of that which is kind of what lets us make big improvements and if you look at this last year.
We had about 20 points of improvement over the last 12 months from.
From Q4 to Q4 in non-GAAP operating margin and said this is kind of roughly that again.
Between the RF and the existing improvements and the additional growth in revenue.
Got it thank you.
Alright, as a reminder, if you'd like to ask a question. Please raise your hand.
And our next question goes to Kash Rangan with Goldman Sachs.
Yes.
Hey, guys.
Okay.
Thank you so much so much static here nice to see you guys Jay Stephanite shape. A question for you when you look at the flick J for you.
How much work needs to be done to fling to make it.
Our solid.
In terms of research and development product development give them produced.
The core platform, it's taken so many years to come to shape.
What does the path ahead for flank.
And when you said it could be as largest kafka I'm curious to see if theres any pent up demand that customers have been asking for I know you highlighted a few customers including us.
They are saying that you could do better with flink.
Good cause them to allocate bigger budgets and I have one for Steffan, yes, yes, theres a couple of things.
The technology I think is in good shape.
It's a successful piece of technology in its own right to turn it into a managed cloud service is a ton of work.
So a huge amount of work.
That's something we'll work on for many years right and so we'll release the products that there'll be more and more to do.
That kind of cloud native bucket that we talk about for the rest of our offering.
The big bucket.
The batteries to customers and so yes, there'll be ongoing work in.
In that dimension in the years to come that's one of the reasons why it's really important to have these core people who are driving that technology forward. It's just a matter of kind of getting the open source and putting it on some servers, which we would need an acquisition to do.
You need to really kind of re imagine the technology as a cloud service and how would how should that work what would that be like that's what kind of creates the good product.
And then in terms of what.
The reception from customers has been fantastic people are very excited about think they're very excited about confluence.
Theyre very excited about the pairing together for many of our customers they were already using flink with confluent.
And so you know.
Yes, absolutely people are excited some people are like well.
You so long.
So yes, it's great to here, we think that there is as with Kafka there isn't it.
Stansell existing installed base and in an environment like this where there is some pressure and theres less kind of net new software projects overall coming out having that existing installed base to grow into is obviously, a really nice second dimension of growth beyond just kind of landing with the <unk>.
Got it one for you Stephen.
Well, how do you look at the given the head count reductions how do you think about cost of customer acquisition and lifetime value.
It looks at the commercial business did well cloud is definitely selecting the platform given all of that how should how should we look at those metrics are they getting better or about the same pre cloud. Thank you so much.
Yes, thanks for the question Kash.
As we look through 2023 and beyond.
As more of our business is coming from cloud and theirs.
The self serve option.
Alright, onboarding et cetera, our LTV to CAC should be improving.
Over overtime and.
We've made some progress this year.
That just ended in terms of optimization, but when we look at LTV to CAC over the longer term, we see that we see that improving on an annual basis.
And and that's a reflection of both the restructuring that we're doing but then also the profile of the revenue streams that are coming in that are just a lower cost of customer acquisition.
Wonderful. Thanks. Thanks, so much. Thank you all right. Thank you I'll ask two questions today come from Keybank first followed by credit Suisse Alright.
Great. Thanks, Sharon Joe just for you I wanted to get your thoughts on kind of how do you keep that net expansion rate pretty strong in that 130% range going forward.
Giving what is kind of a more technical sale as you kind of evaluate kind of the.
The lower workforce going forward, just how do you keep customers keep expanding and thats pretty impressive rate, while also trying to balance that profitability.
I think theres a number of things that go into that one is just we have a consumption model. So it is very possible for customers to use either other parts of the product or use the product for new users and making that as easy and frictionless as possible. There's a lot. We can do and are doing to continue to drive that making sure that that folds well into the motion that the.
Sales team has we're actually at our sales kickoff event right now and Thats one of the Big focuses for US is making sure people understand how to play well with that consumption motion have the product helped drive them into new use cases helped drive that expansion I think that's a huge area of opportunity for us.
And then making sure that we have the right use cases that we have the right senior connections and organizations that kind of blessing is critical to really get broad and organizations and get to larger.
Larger dollar spend and organizations, especially in this environment people need to know what it's for.
And then we're coupling that with this.
We've really gotten very good in the last year and I think.
Getting better still at the kind of TCR and ROI story, what is it that youre getting out of this I think all of that helps you kind of continue to expand in an account in a way that the customer feels good about and wants to accelerate rather than something that they see as a problem that has to be sound.
Alright, thanks for that.
Alright last question goes to <unk> with credit Suisse.
Hey, Jay Stefan Thanks for taking my question and Shane Thanks for fixing one zoom just now.
My question is also on the pull forward of profitability and Big picture considering how early we are in streaming.
As you the confidence that you are addressing the market as completely as possible and not compromising any growth prospects I know you've touched on this a little bit, but it sounds like you're reducing some sales and marketing coverage.
Is this because if you if you if you think back to the GSC and you asked software companies then back coming out of 2018, mostly talk about the fact that they slowed down their investment. So again. The question is just around your confidence level that this is the right thing to do.
Yes.
What gave us confidence was just looking at it project by project and investment by investment and a very thorough way.
And having I think a very clear picture of what we want the company to be.
In a year, but also in three years and five years and making sure. We can solve for that and then we have enough people to go do it.
I think you could look at this the other companies that have been on this very fast growth trajectory. There is some opportunity for optimization. If we were cutting 20% I think we would be giving up quite a lot right.
Cutting a little bit I think makes sense given the environment. It's a hard thing to do it it's hard to have people leave the company.
But I think it makes sense given the larger environment and I think it's possible to do that without making big sacrifices in terms of what we need to build and the product that we want to have and also in terms of how we want to go to market and where we want to be set up to expand.
Let's see.
And then just on the product side I know its new but can you talk a little bit about some of the early adoption trend the stream design and stream governance, yeah, Yeah, Yeah, we've seen great results.
They are a little different right. So stream stream governance is a paid offering the stream governance advanced that we just announced and stream designers recent customers who use it accelerates their usage of.
<unk>.
Case equal of connectors of cockpit itself and so yes, we've seen a ton of early adoption of streams designer that's been very exciting for us to get to see people playing with this we think that that's kind of easy to use interface is one of the keys to really making stream processing go broad, whether it's with case equal or flank or whatever that interface on top is a really critical.
Investment for us.
Makes this really easy to deploy within within customers and kind of take the stream processing area beyond these apex companies that are already really gone big with it.
And then.
Governance is just one of these topics it's top of mind for every customer and we've seen really really great results for.
That now emerging product as a business we've seen a lot of consumption driven by that and that was a little bit unexpected we thought that was going to satisfy a need and maybe unblock customers and other things, but in fact, we've seen it actually really outperformed our expectations. So far and we're excited about what is possible for that in the year ahead.
And it's not surprising I think that kind of two pressures on organizations on one hand, they need to do more with data and put it to use to be successful on the other hand, they have just increasing numbers of restriction, how they do that and the risk associated with it. So if you'd give them tools that help balance those two pressures.
It obviously meets with the great reception.
Alright. Thanks, everyone. This concludes today's earnings call. We really appreciate you joining us Hey, Karen.
Okay.
<unk>.
Yeah.
Okay.
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Okay.
Yes.
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Okay.
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