Q1 2023 Confluent Inc Earnings Call

Speaker 1: Hi everyone, welcome to the Conf1 Q1223 Arne's Conference call. I'm Shane Zee from Invest Relations and I'm joined by J CREPS, co-founder and CEO and Stephen Thompson, CFO .

Speaker 1: During today's call, management will make forward-looking statements regarding our business, operations, financial performance, and future prospects.

Speaker 1: including statements regarding our financial guidance for the fiscal second quarter of 2023 and fiscal year 2023. These four 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 not available on this slide.

Speaker 1: is included in our most recent Form 10-K filed with the SEC. We assume no obligation to update these statements after today's call except as required by law. Unless stated otherwise, certain financial measures used on today's call are expressed on a non-GAAP basis and all comparisons are made on a year-over-year basis.

Speaker 1: We use these non-GAAP financial measures internally to facilitate the 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.

Speaker 1: 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.confluent.io.

Speaker 1: Please also know that we will host Investor Day 2023 in New York City on Tuesday, June 13. To join in person, please contact IR for the registration information. The program will also be webcast live on our IR website beginning at 1 p.m. Eastern time. With that, I'll hand it over to Jay.

Speaker 2: Thanks Shane. Good afternoon everyone. Welcome to our first quarter earnings call. I'm pleased to report a strong first quarter with results once again exceeding all of our guided metrics.

Speaker 2: Total revenue grew 38% to $174 million. Confluent cloud revenue grew 89% to $74 million. And non-GAAP operating margin improved 18 percentage points. These results are a testament to the mission-critical nature of our platform, our strong TCO value proposition, and the solid execution of our team despite a volatile macro.

Speaker 2: Environments like this show which products have true durability and which are simply fads are nice to have. I wanted to take the opportunity to explore what drives this durability for conflict.

Speaker 2: The first factor is that Confluent serves mission-critical custom software applications. These are high-value projects that customers invest their expensive software engineering resources in.

Speaker 2: Because of this high investment, the applications tend to target the most valuable use cases last a long time. We often hear from customers about applications lasting not just years but decades.

Speaker 2: Naturally, the underlying data platforms used by these applications tend to persist along with them.

Speaker 2: The second factor is that unlike a database, Confluent isn't just a platform for one app, but acts as an interchange between multiple teams and applications. This is inherent in the core use case of the technology, publishing streams of data, so multiple other applications and teams can consume those streams. This kind of multi-team, multi-application platform gets more and more sticky as it gets more heavily used.

Speaker 2: and displays very different dynamics in the platform that each application can choose or abandon independently. The reason for this is very obvious, the migration to another platform would require a coordinated effort across many teams all at once, which becomes harder and harder to imagine as there are more and more producers and consumers building against the streams of data in the platform.

Speaker 2: By analogy, I think of the costs of switching to a new incompatible telephone system. The challenge isn't buying a new phone, it's getting all your friends to do the same thing at the same time so you can still call them.

Speaker 2: This pattern of cross-team interaction and cross-application interaction is a unique and positive characteristic of data streaming and isn't shared by most other data systems.

Speaker 2: The third factor of our durability comes from the inherent TCO advantage of our cloud offer. I'm going to dive into this factor at length as it's critical to understanding the deep technical mode that Confluent has built. Initially, it might seem that a customer, when faced with budgetary pressure, would want to migrate off of the cloud data service back to open source. Open source, after all, is free. Why isn't this happening?

Speaker 2: It is no doubt, in part due to the comprehensive features and functionality our platform offers. We've talked about this at length in prior earnings calls, but you would imagine the customers might choose to forego better functionality when faced with severe budget pressure. Why isn't this happening?

Speaker 2: The answer to this may be somewhat counterintuitive. The cloud data service has the opportunity to not just be better than an open source offering, but also be meaningfully cheaper. To understand this, it's important to understand what drives the cost structure of self-managed data systems. This is an analysis we do frequently since we offer both a self-managed software offering in a cloud service.

Speaker 2: We've worked with thousands of customers with on-premising in the cloud to analyze and compare the cost structure of open source self-managed software and a fully managed cloud service. I'll walk through this analysis and show where our substantial TCO advantage comes from. There are two easily quantifiable areas of spend around a self-managed software system. The first is the cloud infrastructure for running Kafka.

Speaker 2: This spans compute, storage, networking, and any additional tooling needed to keep Kafka up and running smoothly. These costs tend to increase rapidly, eventually representing the largest portion of cost when usage is at scale. The second is the software engineers and operations people responsible for configuring, deploying and managing Kafka.

Speaker 2: Like any data system, and particularly like any large-scale distributed data system, Kafka requires full-time staff to manage it. And the cost of these individuals is significant, particularly for people managing Kafka. A 2022 study from dice.com listed Kafka as the fifth highest-paying technical skill. That's great for engineers doing Kafka DevOps, but not so great for companies hiring teams with the experience of Kafka DevOps.

Speaker 2: the same open source software and operating in the same way, our costs would be no different from theirs. However, Confluence has rethought the problem from the ground up and has built a deeply differentiated stack that's able to drive compelling savings in both of these areas. I'll start with infrastructure savings. Confluence Cloud has rethought and re-implemented the core protocols for data streaming in a way that is built natively for the cloud.

Speaker 2: are offering runs multi-tenant for the vast majority of customers.

Speaker 2: This is a very significant re-architecture, touching virtually every tier of the stack, allowing us to pool our thousands of customers on shared infrastructure to drive higher utilization and a serverless experience. This is a very significant re-architecture, touching virtually every tier of the stack, allowing us to pool our thousands on shared infrastructure to drive higher utilization and a serverless experience.

Speaker 2: Next is elasticity. Our intelligent tiering of data between memory, local storage, and object storage helps manage the costs of stored data and allows instant scalability enabling higher utilization of compute resources.

Speaker 2: Next is our facilities for sophisticated data balancing. Complluent uses the real-time performance data of our customer base to intelligently optimize the placement of data and the routing of traffic to maximize performance, utilization, and cost.

Speaker 2: Finally, networking and data replication. Confluent has optimized the replication of data and the networking's background in data to drive the cost of networking, the most expensive aspect of cloud operations for stream.

Speaker 2: In addition to this, HatScale Discounts targeting our unique workload help reduce spent. Confluence is now at a larger scale than most our customers, and we are able to drive discounts targeted to our workload.

Speaker 2: These significant architectural advantages, combined with thousands of small continual optimizations, every layer of the stack, help drive our significant cost advantage in operations. Those who have watched our gross margins progress of the last few years have observed this continual progress at work as we've continually driven additional technical improvements and improved utilization from multi-tempage operations.

Speaker 2: The improvements I outlined previously drive vastly higher utilization, and hence we manage an order of magnitude fewer servers than we otherwise would.

Speaker 2: But the big difference in our operations is that it is done by software, not people. We orchestrate rollouts with a sophisticated feedback driven system that allows safe rollouts across thousands of machines in hours. We are able to automatically detect and remediate the kinds of rare problems that become common at scale. And we have real-time monitoring and checks for every aspect of the integrity of the system.

Speaker 2: These capabilities provide us with a dramatic advantage in the cost of human management. For example, in our Kafka service, the centerpiece of our offering, Confluent has less than five Kafka engineers on call for our tens of thousands of production Kafka clusters. This gives us a cost structure for operations that we believe is over a thousand times better than our customers. The combination of these savings across infrastructure and operations allows us to offer our service at a price point that makes our product not just better, but also...

Speaker 2: This is a point often missed by investors looking to make analogies from on-premise open source models to the cloud, which in fact are quite different. Traditional on-premise open source business models offer a premium product, better features for more money. As a result, they typically are able to capture only a fraction of the open source users as paying customers.

Speaker 2: The cloud product, however, isn't just replacing the free software. It's also replacing the expensive infrastructure and people costs. This is driving a general mindset shift among software engineers and IT departments who are increasingly looking for managed services first, trying to avoid ongoing operations wherever possible.

Speaker 2: As this shift takes place, we think there is an opportunity to grow from our modest penetration into the hundreds of thousands of open source Kafka users to a much more complete coverage. This higher conversion rate is already apparent despite being a much newer offering and despite the much higher bar of maturity for a cloud service.

Speaker 2: Today, Confluent Cloud is already used by more than six times as many customers as Confluent Platform, our self-managed software offering. In fact, we are so confident in this value proposition that we invite prospects to come and take an assessment where we jointly do analysis with them to prove to them that choosing Confluent will be a more economical decision than self-supporting open source.

Speaker 2: is built on Kafka to compute usage and invoices in real time for millions of end customers. It is scaling rapidly to accommodate expected growth. But they quickly found that managing open source Kafka was costly and diverted expensive engineering talent from innovation to low level infrastructure management. With Confluent Cloud, they are able to reallocate at least 60% of their engineers time managing Kafka.

Speaker 2: of this customer's applications across hundreds of teams, spanning digital, fraud, payments, analytics, and more. The bank is now going all in on the cloud, undertaking a massive cloud migration to operate more efficiently and introduce new innovation to their customers faster. To accelerate their cloud migration, they closed a seven-figure, confluent cloud deal to connect their data from on to...

Speaker 2: opportunity for similar expansion and other customers as the financial services sector moves to the cloud.

Speaker 2: In closing, the significant product and cost advantages of our platform put us in a strong position to tap into the hundreds of thousands of users of Kafka with a product that is more than 10 times better and meaningfully cheaper than open source. These dynamics put us in the enviable position as the leader of a $60 billion market opportunity.

Speaker 2: I look forward to seeing many of you at our investor day, where among other things will dive deeper into the significant product innovation driving the success of our platform.

Speaker 2: With that, I'll turn the call over to Stefan to walk through the financials. Thanks, Jay. We kicked off fiscal year 2023, beating our guided metrics, delivering high revenue growth and strong margin improvements in the first quarter.

Speaker 1: These results demonstrate another quarter of consistent execution from our team in a tougher economic environment. Turning to the results, RPO for the first quarter was 742.6 million, up 35%.

Speaker 1: Current RPO estimated to be 64% of RPO was 477 million of 44% in accelerated from last quarter.

Speaker 1: Growth in RPO, while healthy, was impacted by a decline in average contracturation, additional budget scrutiny, which elongated our deal cycle, and a tough cop against the eight-figure TCV deal closed a year ago.

Speaker 1: Moving on to NRR, starting this fiscal year, we move to consumption-based NRR for Confluent Cloud, which provides better alignment and insight to the underlying consumption trends of our cloud business.

Speaker 1: Total NRR for K1 was above 130%, and Chris retention was above 90%.

Speaker 1: NRR for both cloud and hybrid customers remained higher than the company average, and NRR for cloud was the highest. NRR for cloud was the highest.

Speaker 1: We added 160 net new customers, ending the quarter with approximately 4,690 total customers of 14%.

Speaker 1: The growth in our large customer base continued to be robust, driven by use case expansion. We added 60 customers with 100 care more in ARR, bringing the total to 1075 customers up 34%. These large customers contributed more than 85% of total revenue in the quarter.

Speaker 1: We also added eight customers with $1 million or more in ARR, bringing the total to 135 customers up 53%.

Speaker 1: We've included historical results for NRR and customer count relating to the ARR methodology change in our IR presentation on our website.

Speaker 1: Turning to the P&L, total revenue grew 38% to 174.3 million.

Speaker 1: Subscription revenue grew 41% to 160.6 million in accounted for 92% of total revenue.

Within subscription, Confluent Platform revenue grew 16% to 86.9 million and accounted for 50% of total revenue. Confluent Platform outperformed relative to our expectations and was driven by strong performance in the public sector vertical.

Confluent Cloud exceeded 50% of total new ACV bookings for the sixth consecutive quarter. Cloud revenue grew 89% to 73.6 million, representing a sequential increase of 5.3 million, exceeding our guidance. Cloud accounted for 42% of total revenue compared to 41% last quarter.

The modest increase in cloud revenue mix relative to historical trends was due to the outperformance and complement platform in the quarter Turning to the geographic mix of revenue revenue from the US grew 32% to 103.9 million Revenue from outside the US grew 49% to 70.4 million

Moving on to the rest of the income statement, I'll be referring to non-gap results unless stated otherwise. Total gross margin was 72.2% up 250 basis points and modestly above our target range of 70 to 72%. Subscription gross margin was 77.5% up 200 basis points.

Our healthy gross margins were driven by the continued improvement in the unit economics and scaling of our cloud offering, offset by a continued revenue-mix shift to cloud. Turning to profitability and cash flow, operating margin improved 18 percentage points to negative 23.1%, representing our third consecutive quarter of more than 10 points in improvement.

Q1 operating margin was driven by our revenue app performance, which we let flow through to the bottom line and our continued focus on driving efficiency across the company.

We drove improvement in every category of our operating expenses, with the most pronounced progress made again in sales and marketing, improving 11 percentage points. Net loss per share was negative $0.9 using 291.9 million basic and deleted weighted average shares at standing. Fully deleted share count under the Treasury stock method was approximately 350.1 million.

quarter with 1.85 billion in cash, cash equivalents, and marketable securities.

Now I'll turn to our outlook. The demand environment for data streaming and the solutions we're offering to the market continues to be robust, even in a choppy macro environment where it's taking longer to close deals.

Mid last year, we were early to flag the increase in the volatility of the business environment and incorporate those dynamics into our outlook.

Looking out to Q2 and the balance of the year, we're expecting to deliver on the commitments we outlined on our last call.

We are assuming there's a continuation of additional budget scrutiny and there will be no improvement in the business environment through the remainder of this year.

We'll continue to proactively allocate capital to drive the fishing growth and are managing the rate and pace of investments. For the second quarter of 2023, we expect revenue to be in the range of 181 to 183 million, representing growth of 30 to 31%. Cloud sequential revenue adds to be in the range of 7.5 to 8 million.

like 297 million weighted average shares outstanding.

For the full year 2023, we expect revenue to be in the range of 760 to 765 million representing growth of 30 to 31%. Non-GAP operating margins to be approximately negative 14% to negative 13%. And non-GAP net loss per share in the range of negative 20 cents to negative 14 cents.

using approximately 300 million weighted average shares outstanding.

Additionally, for Q423, we expect to deliver 48 to 50% of total revenue from cloud and achieve break even for non-Yap operating margin.

The timing for free cash flow break even will roughly mirror that of our operating margin.

In closing, I'm pleased with the strong start to fiscal year 2023, while the macroeconomic environment remains challenging, we're continuing to deliver innovation and value to our customers, which would not be possible without the excellent performance of the members of our team.

Looking forward, we remain focused on driving efficient growth and building a profitable business.

Now, Jane, I will take your questions. Thanks, Stefan. To join the Q&A, please raise your hand on Zoom. When you're selected, make sure to unmute and turn on your video. We'll now pause a few seconds to assemble the Q&A roster. And today, our first question will come from Sanjit Sen with Morgan Stanley , followed by Wells Fargo. Sanjit, please go ahead.

Thank you for taking the questions and grats on the various all results in what is a pretty difficult environment out there. And to that point, I'm Stefan. I was wondering if you just give us some color on how the quarter progressed, particularly post Silicon Valley, what trends did you see in terms of booking trends, you know, customer engagement and what's been sort of the early reads.

April going into May. On the booking trends throughout the quarter we saw a typical linearity pattern that we would see in most Q1s. January started off as typical which is usually a little bit slow and then it ramped up from a booking standpoint and we had a good strong...

month three. From a consumption basis, we did see a little bit of an impact relative to some of the consumption trends in our cloud business in the second half of March. And we saw that Anapest itself in the financial vertical. What we did see though in April is a nice bounce back.

And so we saw a return to normal patterns for the consumption business and the financial vertical. And Jay, I don't know if you have other things you like to add onto that. I think that was a good summary. Yeah, broadly, the results were not too surprising, even though I think in some customers both intact.

and in financial services, there was a fair amount going on in the organizations.

Yeah, I appreciate that. It makes a lot of sense and encouraging to hear about the trends, you know, post-March on the consumption side of financial services. Jay, you did a fantastic job of sort of, you know, explaining the value proposition of Confluent Cloud and the TCO changes that Confluent's bringing to bear the market.

I guess the other side of the coin in terms of what we're trying to better understand is the impact of generative AI. And if you're thinking about the classes of applications and the interfaces of those applications, what do you think is the impact on real-time streaming? Is that a forced accelerator or a radar for the category in terms of the apps or is out of potential headwind?

Yeah, it's absolutely an accelerator. I mean, it's early in terms of production deployments, as you would expect, but all ready, we have customers that are doing this for real, including a large travel company that's building real-time context data and using that to power chat interfaces for their customers.

And I expect that to be a pattern that is more common. You know, generally speaking, when there's a new major area that data may need to go towards, that's a powerful thing for Confluent, you know, the more new things, the better for us. And so, you know, I know in some areas, it's actually a bit of a disruptive force, but for us, this is actually a powerful thing. And you know, our role in that architecture is kind of...

organizations, whether that's support, engineering, legal, where there's a significant amount of work that is basically text in and text out that all of those teams can potentially be made more productive, you know, kind of up their game as a result as some of these tools come into practice. If I can just clarify and get your feedback on this sort of logic.

When we're interacting with these question and answer type interfaces, is the simple point that we need up to date data and that you guys are going to be able to provide that? I mean, to the extent that we're doing, doing with the public chat GPT, we're dealing with outdated data, right? And potentially data and rest in other use cases.

is what Confluent Point to do is bring that data up to date, so we're getting the most up-to-date answers to our questions. Yeah, that's right. The architecture for these is both some amount of training that's usually done entirely by the centralized companies, say, and OpenAI's case, followed by maybe some amount of pre-training on data specific to that customer, and then most importantly, assembling the right information about the particular customer at the time of the question.

Right, and that's the that last bit is the part where we're most relevant and that that's actually quite important just fitting this into You know a business that serves particular customers in particular ways that would have particular context about them that has to be incorporated in any response. I appreciate the thoughts Jay. Thank you very much.

Thanks, Sanjit. We'll take on next question from Michael Turn with Wells Fargo, followed by Piper Samar. Hey there. Good afternoon. Appreciate you taking the question. Nice job on the Q1 result. Seth mentioned the AR statement. It looks like it's tied to consumption. Can you maybe just help level that where those changes show up and then on NRR it looks like using the old method that number.

They continued to come down and touch. So maybe walk through what you're seeing there and what you're assuming on the expansion side for the rest of the year.

The NRR change really impacts our cloud business prior to making the change. We had a commit based NRR calculation, which didn't really capture the underlying momentum of our cloud business. With the consumption change to the NRR calculation, we're in the...

it dog snowflake, they all have moved to a consumption based NRR. So where it shows up is

in our cloud business and then also in our hybrid customer and our cohort because those hybrid customers are running with Confluent platform and Confluent Cloud Confluent platform will continue to be on the like the older methodology, which is the committed contract basis. But for the portion of their business that is Confluent Cloud will calculate it using

business continues to be very strong above 90%. But considering the current macro environment.

We just saw less expansion driving, that was driving through like the committed contract part of the business. But what we did see and what's better reflected in the new methodology is the consumption patterns of our customers are exceeding the committed contract spend.

And so those were some of the dynamic set play and going forward where we will be reporting a consumption based and our arometric and that is again better reflective of the underlying performance of the business.

That's super useful detail. If I can just follow on with just a quick point on what you're mentioning stuff. And I think sometimes the visibility you have into cloud consumption patterns is maybe underappreciated. So the commentary is consistent around sequential improvement on the cloud side throughout the course of the year. Just any color you can provide around what.

visibility you have and what provides confidence in that progression continuing. We've taken great steps at organizing our business around a consumption-based approach. And that starts with our sales and go-to-market motion. Our sales folks have a consumption-based.

element to their quota. We've been a cloud first company in terms of development cycles. And then we've done a lot of instrumentation around systems and process around forecasting. So as we look through the balance of the year, what we said at the beginning of the year still holds up. We see that sequential revenue add for...

exiting the year and that gives us the confidence to put that stake in the ground.

Thank you very much. Appreciate it. Yep. Michael, we'll take on next question from Rob Collins with a Vibersaler followed by TD dollars.

Thanks Shane. Thank you guys for taking my question. Good afternoon. Stefan, I know you just spoke to it to some degree, but you called out Gross Retention Rates. It's there above 90. Can you? But walk us back a couple of years. You know, the last time we saw just rupturing around Cove and

So I thought what the experience with retention was then versus now and is this becoming a much stickier application at this point.

It definitely is a much sticker application today than it was a couple of years ago. A couple of years ago.

The product that we had in the marketplace, but while it was good, it didn't necessarily have all of the mature feature functionality that we do today. The amount of innovation our product and development organization has driven over the last couple of years. There's a market difference between our product today versus what it was.

two years ago. And so a couple of years ago, the gross retention rates were lower, the net retention rates were lower. Now we have really healthy net retention rates and gross retention rates due to the product maturity. And then also, if you layer into the improvements we've made to our go-to-market organization,

We have this customer growth go to market journey that we've socialized with the investment community. How we land customers is very important and then how we develop them over time through the progression that they start with from Pago all the way up through.

a fully mature implementation of our solution. It just has become much more sticky and because we're an infrastructure play, this is not something that can be easily ripped in replace or downgraded to the open source version. There's a vast difference between our Confluent Cloud offering and anything that you could get in open source.

and they're in lies the big differential. Great. I guess, thinking of the side of that for Jay, maybe talk a little bit about customer acquisition right now and just what's convincing new customers to move in this environment? Yeah, I think it's a number of things. I mean, it starts with the kind of mission critical applications. I think those are the ones that tend to move forward in this environment. The second aspect is the TCA that I talked about, and ultimately the feature set of the product. I think that combination of being attached to a project, which is...

Great. Thank you both. Thank you. Thanks, Rob. We'll take our next question from Derek Wood with TD Collins, followed by Google Hi. Great. Thanks and congrats on a strong Q1. Just picking up on that, Jay, I thought you did a really good job outlining the advantages of Cloud and what you guys are doing versus on-prem. I wanted to talk about there's a lot of Kafka DIY out there ranging from very large cluster deployments from tens of thousands of companies in the long tail. Obviously, you guys have some really compelling TCO and ROI figures.

Is the macro a tipping point to drive more conversion and when you look at kind of the top end of the pyramid and the bottom end? Are you focused on one end or the other more in this environment to drive more open source conversions? Yeah, I think it is ultimately helpful. You know, the initial impact of some downturn is not helpful.

and not getting the, you know, next 100,000 Kafka users who are just starting now, that wouldn't make sense either. Either right, it makes most sense to start with them as they go. So the reality is, you know, both in terms of the TCO and the customer experience, you have to be good all along the way.

And that's the journey we've been on. And I think the cool thing about where we're at with our cloud product right now, is we have substantial customer usage at each spot along that. And indeed, we're kind of going out to the open source users and converting them over to this now, whatever stage on that journey they happen to be on right now. Great, great color. And Stephyn, just wanted to last quarter, or do you talked about kind of less urgency from buyers at the end of the quarter or any head deals slip? Just wondering, did those slip deals kind of close as expected? And did it feel like the that kind of headwind and the quarter dynamic that you saw in Q4?

Faded a little bit in Q1 because it didn't seem like you had any big surprises, but just wanted to get a sense for how Endham Corps compared sequentially.

The majority of the deals that had flipped from Q4 did close in Q1, which was great. We still are seeing the same dynamic that we've been calling out for the last several quarters candidly where customers are taking more time to evaluate purchases, see long-gating deal cycles. We've been able to execute through that and set guidance appropriately. And so we did see similar dynamics at the end of the quarter. And we're anticipating that that dynamic is going to be factored throughout the balance of the year.

So that's really the dynamic at play. Thanks, Scott. Appreciate it. Thanks, Derek. We'll take on next question from Howard Marrow with Google Hying followed by Bargley. Great. Thank you. Jay, don't tell me on some of your comments about TCO and the value prop of both platform features and fully managed.

expansion, hope expansion and new use cases that give you confidence in achieving your targets this year? Yeah, absolutely. I mean, you would see this across virtually every industry, you know, the one that we called out in the earnings was this large expansion in financial services. Yeah, that's the industry that...

Obviously a lot is happening in and so the willingness to make big bets on this in the cloud, right? These are organizations that are very sensitive about security, about compliance, etc. Really do a thorough job of betting. The willingness to make a big bet in this area is...

Really one of a small number of third party cloud infrastructure vendors. I think that speaks to how critical this area is. You could probably come up with a similar example in any other industry of the interests, whether that's retail, insurance, automotive.

public sector, you know, really, really exciting things happening in each of this. Okay, okay, great. That's helpful. And I have a follow up for Stefan. Stefan, can you comment on your go-to-market priorities this year? Your investment priorities in particular, I guess with respect to hiring more reps, bolstering customer retention efforts.

building out further building out the channel ecosystem and do you have anything changed in the last few months that would require you to invest more in any of these fronts that would I guess derail were impede the you know the plans to reach break-even exiting your end we establish a plan at the beginning of the year and that

focused on a number of investment priorities in the sales and good market organization. And a lot of that is based off of quota capacity that we wanna ensure that we have across the world. And we will continue to be hiring in areas that show the most promise and that have the most potential ROI for us. We will continue to make investments in our customer success organization, ensuring that the experience for the customer.

continues to be excellent that will both bolster our gross retention rates. Nothing has changed relative to our major investment priorities for the year. In fact, been very pleased with the performance of how the groups are operating in a very choppy environment.

If you look at the growth in RPO, if you look at the growth in CRPO in particular, we had an acceleration in CRPO this quarter. And that's in part due to the great work that the sales organization and the go-to-market organization is doing. So to answer your question, no real changes relative to our plan.

Thanks Howard. We'll take our next question from Riemel Lenscher with Barg?z, follow by Misesu. Thank you. Hey guys, congrats. Great start of the year. I have two questions. First on cloud. Obviously they could be discussion going on with clouds, consumption, optimization, etc. and we talked about it a little bit.

Jay, in one respect, a you guys part of that, can people kind of buy you through the marketplace now, and that's kind of a little bit of a headwind? Or is it more like people don't do, no, like there's a finite number of new projects starting this environment, and that kind of more was kind of creating a headwind for you?

And then first step on the if you think about it like you obviously out the phone Q1 well done you you kept the full your guidance. That kind of is either more uncertainty or you know there's more of a buffer in the year could you just talk a little bit out of puts and takes that took your kind of guidance for the volume. Thank you.

Yeah, I'll start with the first question. I think it's ultimately like, hey, to what extent are we subject to optimization, cloud optimization, which is a topic in every user of the public cloud, including us, and to what extent are we impacted by potentially fewer net new software projects that are occurring.

Yeah, I would say the latter is probably the most significant factor, right? So our expansion is driven by new projects coming on, adding their data streams using the technology, you know, taking it out to new use cases. The rate of that is certainly an important variable for us in growth.

In addition to how active we are at converting those use cases, which is about the TCO and comparison to open source, etc. So those two variables are very important. Is it possible to optimize the usage of conflict? Yeah, of course. It's possible to optimize the use of any SaaS product. And this shows up quicker in products that have a consumption revenue model.

in the consumption models.

Within those products, of course, it's wildly different how much optimization is possible. And that has everything to do with what the product actually does, right? How much do you actually need the thing that you bought? Is it in fact a mission critical thing that you're going to keep running? Or is it something where you can just turn off if you don't need it? And that's an area where I think we have it very good. And that's part of the mission critical part of the production application.

we don't see as much of it. And so typically as we have kind of consumption coming online, it's kind of mostly pre-optimized. There may be further optimizations that will happen, but of course that all folds up into that overall net retention rate. And we haven't seen any big changes in that in the last few quarters. Customers of course are trying to optimize, but they're also adding new projects, which drives expansion. What you see is kind of the combination of those two factors which...

I think, you know, we may end just quite strong. Good. Thank you. And then turning to your question on guidance, our point of view on the full year remains unchanged from last quarter. The demand environment remains healthy, even though it's a tough macro out there. So we're reaffirming our guide for the full year, growing revenue at 30% and plan to achieve breakeven.

on a non-gap operating margin basis in Q4. We did not flow through the amount of the overperformance we had in the top line this quarter to the full year guide, which is really a byproduct of the macro environment in factors I've called out before, which we're trying to prudently take into consideration while formulating guidance. You asked for some puts and takes. We expect

cloud to continue its growth momentum with the highest NRR and an increase in sequential revenue add every quarter for the remainder of the year. And then the CRPO growth that I pointed out before continues to be robust. NRR remained healthy and both of those things support the growth and in the overall business plan. Okay, thank you. Well done. Thanks, Frank. We'll take our next question from Gray Moskowitz with...

where that stands today? Yeah, we haven't seen a huge change in the ramp up of customers. That's more determined by how long it takes them to build their applications, get them online, get them fully consuming, roll them out, which is the average of companies who are moving very fast and companies who move slower. So I'd say that has less impact from the macro. We have seen a little bit of change in the behavior of customers and how they use

the commits. Stefan called out a little bit of compression in the multi-year stuff. In general, I think customers are just being thoughtful about the amount that they're committing to. And the plus side of that is we've seen very strong consumption against those commit amounts, which is great. That's what we want to see. We don't.

awesome weakness.

Yeah, it did continue this quarter. We've been watching it closely because I think that segment obviously has a lot of these private tech companies that I think are a bit fragile under very significant pressure. And so we kind of have expected to see some hit there and have not. I would describe that primarily to the fact that there's just a lot of untapped opportunity.

All right, as a reminder to ask a question, please click on the raise hand button and our team will promote you to the panelists.

I think we're still waiting for for Deutsche to join the room. Ryan, let's go to Eric Keith from KeyBank.

percent of Confluent cloud coming, of revenue coming from Confluent cloud in 4k. Just curious if that's more so a function of new use cases being brought online being a little bit slower than you expected or is it growth of existing use cases moderating a little bit?

It's a little bit of a combination of both. And then as we think about just the mix of business, we did have a strong Q1 for a platform. And we look at the overall mix for the year. And so we modestly shaped the guide for

for our cloud business. Originally we said approximately 50% for the year. We basically gave a range, widened it a little bit to 48 to 50. I will say that given the run rate that we have with Confluent Cloud, we're almost at a $300 million run rate, growing at 89%.

The consumption of Confluent Cloud continues to be robust. So when we think about use case expansion opportunities, there is a natural network effect with the consumption business that we're seeing. In this environment, sometimes it does take companies longer to deploy new workloads, etc.

So that was factored in to the 48 to 50 percent comment that I made earlier. And Jay, if I could just ask you a question that might have missed the beginning of apologies, but just on standard of AI, I mean, Kafka and Flink are challenging technologies and finding people those.

skill sets is kind of difficult. Just curious if there's an opportunity to leverage generative AI to basically democratize access to those technologies. That's something that could bring more users onto the platform. Yeah, absolutely. I did address this briefly, but the answer focused more on what's the role we provide in generative AI architectures.

The flip side of that is, what are the use cases for us? And of course, to the extent that software engineers can become more productive in building applications around this through tools like co-pilot and things like that, obviously we've become more efficient building our products, but also our customers actually can be much faster at consuming our products. And that's a phenomenal thing. We'll have to see how it all plays out. I think that.

full impact of this and then how it plays out as it happens in all companies is really hard to kind of, you know, estimate the second order effects of what all that means. But I think it's net-net a very positive thing for us.

All right, thanks Eric. We'll take our next question from Rudy Kasinger with DA-Davidson. Rudy? Great, thanks for taking my questions guys. Hey Stefan, gross margins last couple of quarters, certainly trending a bit above your midterm target, more so in the range of your long-term target. How should we expect those to trend near term? Why are you seeing the outperformance there? And when we look at the guide...

you know, you reiterated the revenue, but you took up the operating margin a bit. And is the gross margin outperformance the primary source of that upside in the operating margins? Because it sounds like you're keeping hiring plans pretty much the same. Well, gross margin has been a bright spot for us, especially given the dynamics at play where we've had an increase in confluent cloud revenue really go exponential over the last

call it two years, two years ago it accounted for 18% of revenue and today it accounts for 42% of revenue and it comes at a lower gross margin for a file than then then platform and we've made a lot of progress on the unit economic unit economics there and and we've seen really really strong really strong growth. So as we look towards what the future holds we feel comfortable with the 72% range.

because we think the cloud business will continue its upward trajectory. Longer term, we think it'll be called the mid-70s. The rate and pace of us being able to expand there is going to be dependent upon a lot of the engineering work that we're doing, the price discipline that we have, and the value that we're bringing to our customers.

And then as it relates to how our overall guidance worked for not only Q2 but for the balance of the year, we are anticipating being at the higher end of our year term range of 72% in gross margin. We are definitely letting that flow through the bottom line. But we are also seeing

the efficiency work that we've been really focused on across all OPEX line items paying off. And so our operational cadence around efficient growth is playing out. That work is never done and we're laser focused on delivering it, but we're very happy that we're able to deliver top line revenue growth as in what we call high growth mode.

and it was only over 50% this quarter. So obviously the new bookings mixed trend and more terms platform. Anything in particular that you think drove that strength.

We called out the strength in the public sector vertical that tends to be a platform business, and those also tend to be one-year deals. It was actually the best Q1 in public sector that the company has ever had. That really drove the strength in the platform overperformance. Because of that strength, we did see a mix shift.

from an ACV standpoint, while cloud was greater than 50%, it did come down from a mixed standpoint, given just the strength and complement platform. I will say that complement cloud, we've had now six plus quarters in a row of greater than 50% of net new ACV being complement cloud. So that business is still continues to grow at a very rapid pace. It was just that.

Confluent platform deals tend to be lumpy and they can be seasonal also and that's what we saw play out this quarter Guys, that's helpful. Thanks for taking my questions and congrats again on the good numbers here. Thanks, Rudy. Thanks, Rudy. We'll take our last question from Shevly with the FBI Securities. Yes, thank you very much. So, um, What was your headcount number for Q1? Did you complete the 8% headcount reduction that you announced?

And do you anticipate further headcount reductions as the year progresses? Yeah, do you want to take the headcount question seven? Yeah, so we substantially completed our restructuring. It's not 100% done, but it's substantially complete. We haven't disclosed the actual ending Q1 headcount before.

So I can say it's it's below what it was like at the end of Q4 for obvious reasons due to the restructuring and.

We are continuing to be focused on driving operational efficiency throughout the year. And so Jay, I'm happy to turn it over to you to answer any other part of the question. Yeah, yeah, yeah, we're not planning for any further reductions at this point.

Okay, and I get that your cloud gross margin declined two points sequentially in Q1, the first time that's happened in my model. If I assume like your platform gross margin is like 88% or high 80s, you get around 65% for the cloud in Q1 from 67% in Q4.

First of all, did that happen? Was there a gross margin decline in cloud for the first time sequentially? Why did that happen and what's your outlook going forward? Well, we don't guide on the specific componentry of platform versus cloud gross margins. But what I will tell you is, I know it's hard to model.

Thank you all very much for joining us. We look forward to seeing many of you at our upcoming conferences and our investor day in June . Take care. Thank you all.

And re.

I'll see you in the next video.