Q2 2023 Confluent Inc Earnings Call
World Class team and taking us through all nine quarters of earnings as a public company. Thank you and best of luck with your new role. Thank you Jack it's been an amazing experience and career milestone to work with you and the talented team accomplished we've built a deeply differentiated platform that's powered our robust growth, which positions the company very well for the future.
I cannot think of a better leader then real hard to help guide the company to the next level as complex new CFO .
<unk> is truly an exceptional leader we've known each other for nearly a decade and we're closely at both <unk> and Palo Alto networks, Congratulations Ron you'll do great in your new role.
Thank you Stephanie congratulations to you as well it's been a pleasure working with you over the years and I'd like to wish you the very best in your next role.
We have a world class innovation engine and an amazing team at confluent.
We are a market leader in a $60 billion Tam and we're just getting started.
We much look forward to driving efficient growth in the years ahead now back to you Jay.
Thanks, Ron turning now to our Q2 results total revenue grew 36% to $189 million constantly cloud revenue grew 78% to $84 million and non-GAAP operating margin improved two four points, we have driven more than 30 points of margin improvements in the last 18 months and are well on our way to breakeven.
In Q4 this year the.
Achieving this sustained level of high growth despite ongoing market challenges underscores the mission critical nature of data streaming and reinforces our product leadership.
In May we hosted Kafka Summit, London 2023, this year more than 500 members of the community from over 50 countries joined us in person with greater than 2300 tuning and virtually.
On our Q1 earnings call, we talked about the opportunity for monetizing Kafka confluence cloud. This was emphasized to Kafka summit with the unveiling of Cora. The next generation engine that powers confluent cloud, we shared with the audience. Some of the architectural elements that enable our cloud to drive <unk> advantage and performance, while delivering a 60% <unk> improvement.
Our Costco business has phenomenal growth ahead of it modern data architecture is increasingly centered around streaming and this has driven cockpit should be adopted by hundreds of thousands of organizations, including over 75% of the Fortune 500. This open source user base is growing rapidly and we are still in the early days of monetizing the inherent <unk> in.
Performance advantages of our cloud offering meaning that in addition to the natural growth of this user base. We believe we can dramatically improve the proportion that is monetized as usage shifts to the cloud and can be captured by a managed service.
With the extent of confluence opportunity that would be a very exciting prospect and enough to sustain our growth for many years, but copco is just the start in this call I want to outline the evolution console, which is driving in the streaming space and how we stand to benefit from it. This evolution is the rise of the data streaming platform.
Cockpit is the foundational layer in this platform, but outlined today the five key areas of capability that significantly extend the reach and value of streaming infrastructure and that we think are essential elements to the rise of data streaming platforms. The key capabilities of the DSP or the ability to stream connect govern process and share.
These capabilities capture the full lifecycle of streaming data how to get it process. It use it manage it and share it between systems.
Kafka as the stream of data it allows companies to produce and consume real time streams of data at any scale with strong guarantees on the delivery of data.
As the foundational hub of data exchange in a modern data architecture and today. It comprises the substantial majority of our comp fluid cloud revenue, but these other capabilities are not near add ons. They are essential components of the emerging platform and represents significant opportunities for monetization for confluence that are still early in their realization I'll walk through each of these.
Abilities discussed the evidence that each is growing into a broadly adopted portion of the DSP and talk about how comprehensive adding these capabilities to complement cloud.
Our coffee business and complement cloud is growing very fast, but even today are these non coffee components are growing even faster over time, we expect these capabilities to drive the majority of our cloud revenue even as they help to accelerate the use of kafka as the underlying stream.
Let's start with connectors connectors may seem mundane, but they are in fact, a key capability. Indeed, many ETF and integration products differentiate in large part on their pool of connectors.
They are central to our vision as well to build a central nervous system for your business you have to be able to connect all of your systems to capture the real time streams of data confluent cloud makes it possible to run any cockpit connector in a cloud native way, making them surplus elastically scalable and fault tolerant.
This has driven the development of over 120 connectors created and owned by confluence to some of the most common enterprise systems. However, the ecosystem connectors is far larger than just these there are many hundreds of open source connectors to less common systems that are available. We are still early in monetizing this area and confluent cloud is fully unlocking it requires ease of.
Use across cloud networking layers and disparate data and SaaS systems, we took a major step towards this in Q2 with the release of our custom connectors offering which allows running any open source connector inside contour and cloud expanding our reach beyond the set of connectors, we shipped with out of the box. We believe this is still in the early phases of full unlock on premise.
And our confluent platform product connect has approximately an 80% adoption rate, but we are still in the early days of ramping that level of usage in our fully managed offering confluent cloud.
As data streaming use cases grow and real time data flows across internal systems and applications. It's critical that users can discover monitor and reason about the security and integrity of that data.
You need to control, who has access to the data to find how that data is allowed to evolve and visualize and monitor where it ultimately goes creating.
Creating a central nervous system for data is only possible. If you can stream data safely what do these governance concerns have to do with streaming you might ask well it turns out the governance concerns come into play precisely when data moves between systems. When it's exchanged between teams, whereas transported between regions was processed from one form to another in other words data governance.
Needs arise directly from the primary use of state of streaming.
<unk> confluent handles this movements in processing, we are uniquely positioned to directly integrate governance of that movement automatically and seamlessly in a way that no. Other vendor can with a bolt on product. This is the role of stream governance, one of our first moves up the stack into large product opportunity for comp food stream governance as our fully managed governance suite that.
There's a simple self service experience for customers to discover trust and understand how data flows across the business. We have taken a freemium approach to stream governance, giving basic functionality to every customer.
And more recently starting to monetize with our stream governance advanced offering two thirds of our confluence cloud customers are using stream governance today and revenue growth from stream governance advanced is the fastest of any product we've launched to date.
The next area of the GSP stream processing. This is an easy one to understand data processing is a key component of any major data platform and sequel and other processing layers are key components of modern databases stream processing extends these processing capabilities to real time data streams, we believe that Apache flink is emerging as the Deepak.
<unk> standard for stream processing Blink is the most powerful implementation of stream processing of any technology open source, our proprietary fully realizing streaming as a generalization of batch processing and making it available across a rich ecosystem of programming languages and interfaces. It.
It is widely popular in the open source community and is used by some of the most technically sophisticated companies in the world, including Apple capital, one Netflix stripe Uber.
We've discussed the criticality of stream processing to our strategy in the past the easiest way to understand the potential in this area is to understand that for each stream and confluent cloud today theres likely to be some application code processing are reacting to that stream of data that application code represents complex software engineering and the opportunity for flink from the customers.
Point of view is to simplify that development effort from confluence point of view. This allows us to monetize not just the data, but the application itself, while helping the customer to realize efficiencies in both the development and operational costs that are possible with cloud native stream processing layer.
We took a major step forward on our flink strategy. This last quarter, when we announced the early access program and Kafka summit opening up this offering to the first customers who are now actively using the platform early feedback is very encouraging with particular enthusiasm for the direct integration into the other capabilities of confluent cloud for customers. This means theyre stream.
A data and kafka automatically available for processing and flanks equal and that everything works together with a shared model of governance and security. We're incredibly excited about this product and look forward to its broad availability later this year. The final capability, it's about making it easy to share data streams sharing within the company has been a mainstay of our platform for some time however.
Now we have extended that between companies with a feature we just launched our Kafka summit stream sharing.
This intercompany sharing is the pattern, we noticed was gaining startling traction in our customer base in recent years customers in financial services and insurance needed to integrate and provide key financial data streams with a complex set of providers customers and travel either to exchange real time data on flights between airports airlines bookings companies and baggage.
<unk> companies retailers and manufacturers had to ingest realtime streams from suppliers to manage an end to end view of their inventory or supply chain.
Oftentimes these companies would have teams working our complex systems to mediate this sharing only to realize on further discussion that on both sides of the foundational layer that they were opening up with the same it was kafka Stu.
Stream sharing allows these companies to enable this intra organizational sharing for any of their existing streams and to do so in a way that enables the same governance and security capabilities that they'd use internally with added capabilities to address the additional concerns, allowing access from external parties.
This means extending our central nervous system vision, something that spans a company do something that spans a large portions of the digital economy by doing this the natural network effect of streaming where streams attract apps, which in turn attract more streams is extended beyond a single company, helping to drive the acquisition of new customers as well as the growth within existing.
Customers.
It's essential to understand that these five capabilities stream connect govern process share are not only additional things to sell theyre all part of a unified platform and the success of each drives additional success in the others. The connector is make it easier to get data streams into Kafka, which accelerates not just our core kafka.
Business, but also opens up more data for processing and flink adds to the set of streams governed by stream governance or theyre shareable by stream sharing applications built with flank drive use of connectors for data acquisition and read and write their inputs from Kafka governance and sharing add to the value proposition for each stream added to the GSP each of these.
Capabilities strengthens the other for the.
The full value of this will not be realized overnight cloud infrastructure takes time to mature and reach completion.
Each of these areas is earlier in the S curve of maturity and adoption then kafka, but overtime. We think these will directly contribute revenue larger than Kafka itself. In addition to driving further consumption of Kafka.
Most importantly, as what these capabilities that our customers do as these parts come together they comprised a data platform that is as complete as data warehouses data lakes or databases have grown to be over the years. We think this data streaming platform will be of equal size and importance to these other platforms, serving as the fundamental nervous system for a modern company.
This complete platform resonates with companies of all sizes industries and geographies, serving an endless number of use cases, one segment of our customer base that has been under particular pressure in this macro environment is digital native tech companies, who are under increasing pressure to drive new efficiencies. But this is also a high performing segment of our business a testament to our execution and the <unk>.
<unk> advantages of our platform. This includes customers like <unk>, Netflix Plaid and square, we are seeing particularly strong traction in this segment in India, including customers like Michelle niche.
<unk> is a high growth Indian E Commerce company last year was one of the most downloaded shopping apps in the world. It was the fastest shopping app to cross 500 million downloads and regularly sees huge traffic spikes that see over 1 million requests per sector. Kafka is used broadly across <unk> business, including its real time recommendation engine to deliver a great user experience.
For customers and sellers, but manually configuring and tuning open source Kafka wasn't aligned with their overall push for sustainable solutions and driving business efficiencies. So they migrated to confluent cloud console now processes. It's shopping transactions. It is a key part of the architecture that delivers exceptional experiences for buyers and sellers.
Policy genius is an online insurance marketplace that covers more than 30 million customers and their life disability home and auto insurance needs today's customers' demand real time in all aspects of their life, even when shopping for insurance by combining modern tech with real agents policy genius delivers quotes from leading insurance.
Companies side by side in minutes and helps customers through the selection and purchasing process. Initially they relied on our competitors' Kafka compatible data streaming technology to stream policy information to their agents, but they found themselves spending too much time supporting the platform and were caught off guard by surprise costs and as they look to expand use cases, they needed a more.
Complete data streaming platform that can grow alongside them.
After two months Trialing confluent as a pay as you go customers. They went all in on confluent crowd in Q2 with consequent cloud policy genius can save money, while helping their customers feel good about finding the right insurance online.
<unk> Pharmaceuticals is a leading biotech company that uses advancements in AI in biology to accelerate an industrialized the discovery of new drugs traditional drug discovery is often slow and expensive relying on manual bespoke processes and experiments influenced by human bias.
<unk> on the other hand runs over $2 million experiments per week to generate a massive biological and chemical dataset to training machine learning models that discover new insights beyond what is known in scientific literature.
Confluence is the backbone stream infrastructure for experimental data that feeds their AI models with more than 23, petabytes of real time biological and chemical data improving the predictions of the models.
This approach rapidly accelerates the time it takes to discover and develop drugs and ultimately is how they improve the lives of patients all around the world.
In closing I'm pleased with our strong second quarter results. Our results show that data streaming has emerged as a mission critical component of the modern data stack and our rapid pace of product innovation puts us in an excellent position to continue capturing more of the $60 billion market opportunity with that I will turn the call over to step.
And to walk through our financials, one last time.
Thanks, Jay we delivered another strong quarter, beating our guidance on all metrics key highlights for the second quarter included robust topline growth strong customer expansion and substantial margin improvements. These results underscore our leadership position in a $60 billion data streaming market and our team's track record of driving durable and efficient.
Turning now to the results our <unk> for the second quarter was $791 4 million up 34%.
Current RPI estimated to be 65% of <unk> was $514 8 million up 41%.
Our growth rates in RPM, while healthy were impacted by a continuation of lower average deal sizes are result of customer scrutinizing their budgets in the current environment.
Despite the budget scrutiny, we remain encouraged that customers continue to derive value from using confluent and can see more than their commitments, which is reflected in our revenue, but not in our <unk> results. In Q2, we added 140, net new customers ending the quarter with approximately 4830 customers up 17%.
The growth in our large customer base remained robust driven by continued expansion of use cases, we added 69 customers with 100 care more and are are bringing the total to 1144 customers up 33%.
These large customers contributed more than 85% of total revenue in the quarter.
We also added 12 customers with $1 million or more in <unk>, bringing the total to 147 customers up 48% and our $5 million plus cohort continue to grow.
Our expansion momentum shows that <unk> is the platform of choice for data streaming from early stage adoption to cross company standardization and ultimately the central nervous system of our customers' modern tech stack for Q2, NR was above 130% and <unk> was above 90%.
<unk> for cloud was above 140%, reflecting the power of the industry's only cloud native platform made possible with Cora.
Turning to the P&L total revenue grew 36% to $189 3 million.
Subscription revenue was very strong and grew 39% to $176 5 million and accounted for 93% of total revenue.
Within subscription complement platform grew 16% to $92 9 million exceeding our expectations and accounted for 49% of total revenue.
The kings exceeded 50 per cent for the seventh consecutive quarter.
Turning to the geographic mix up revenue revenue from the U S grew 30% to $113 $9 million revenue from outside the U S grew 45% to $75.4 million.
Moving to the rest of the income statement I'll be referring to non-GAAP results unless stated otherwise.
Total gross margin was 75% up 440 basis points and above our FY twenty-three target range of 72% to 73%.
Subscription gross margin was 79.1% of 230 basis points.
Gross margin outperformance was driven by our strong compline platform margin. The continued improvement in efficiency optimization of underlying hardware profile and increased multi tendency in Cora our core Kafka engine and cough alone cloud.
Turning to profitability in cash flow operating margin improved 24 percentage points to negative 9.2%, representing our fourth consecutive quarter of more than 10 points an improvement.
Q2 operating margin was driven by subscription revenue outperformance 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 14 percentage points and we're pleased to achieve zero sense net income per share in queue too. We've included all related shares outstanding amounts used to calculate historical and guided net loss or income per share and our earnings presentation on.
Our website.
Free cash flow margin improved eight percentage points to negative 18.6%.
We ended the second quarter with 1.85 billion in cash cash equivalents and marketable securities now turning to our outlook I would like to provide context on how our approach to guidance continues to evolve in response to what we're seeing in the business environment.
At the beginning of the year, you prudently took into consideration and have been navigating the tough selling environment and the macro related factors of additional budget scrutiny and changes in customer buying behavior, both of which have led to a sales cycle elongation. We've.
We've learned through the first half of this year that customers are more inclined to sign shorter duration contracts start with smaller initial deal sizes and are okay consuming more than they're committed contracts, which has been reflected in our results are point of view is the choppy macro environment. We've seen will continue throughout the remainder of the year.
Even with these macro dynamics at play our data streaming platform continues to grow at outsize rates are subscription revenue growth of 39% in queue to tell us the story.
From a product mix standpoint, coplan platform, which is prevalent in regulated industries as overperformed relative to our expectations.
We expect compline platform to continue to perform well in the second half training above the expectations, we had at the beginning of the year.
Our cloud business continues to be a bright spot given the high net retention rates product market fit strong T. C. O N R. O Y it delivers to customers. We expect cloud to continue to grow it is substantially higher rate than the rest of the business in the second half.
We'll continue to monitor the signals of our business and proactively manage the rate and pace of investments.
If the macro sentiment improves we'd expect to benefit from that but it's too soon to call moving onto our guidance I'm pleased to share that we're raising total revenue gross margin operating margin in EPS for both the quarter and the year.
For the third quarter of 2023, we expect revenue to be in the range of 193.52 $195.5 million representing growth of 28% to 29%.
Cloud revenue to be approximately 92.2 million representing growth of 62% in accounting for approximately 47 per cent of total revenue based on the midpoint of our guide.
Implied in that is a sequential revenue out of approximately $8.5 million, which is above our prior quarter guidance range of 7.5 to 8 million for Q2 twenty-three non-GAAP operating margin to be approximately negative, 10% and non-GAAP net loss our income per share to be in the range of negative one <unk> <unk>.
For the full year 2000, twenty-three, we expect revenue to be in the range of $767 million to $772 million representing growth of 31% to 32%.
non-GAAP operating margin to be approximately negative, 10% and non-GAAP net loss per share in the range of negative five cents to negative two cents.
Additionally, we're raising our FY twenty-three target range for non-GAAP gross margin to approximately 74%.
Four Q4 2023 targets, we can <unk> can you expect to land within the range of 48 to 50 per cent for Clowdus percentage of total revenue, but likely at the lower end due to the factors, we called out before and the strengthen our compline platform business impacting product mix shift.
And we continue to expect to achieve breakeven for non-GAAP operating margin the timing of free cash flow margin breakeven will roughly mirrored that of our operating margin.
In closing I'm pleased with the continue momentum, we see across confident platform and compline cloud our market leading data streaming platform is winning and we're continuing to execute well in a choppy macroenvironment looking forward, we're well positioned to drive durable and efficient growth now J Ro horn and I will take your questions.
Thanks tendon to join the Q&A. Please raise your hand.
And today, our first question will come from Jason Ader with William Blair, followed by Wells Fargo. Jayson. Please go ahead.
Yeah, Thank Shane and good luck to you Stephan you really do have the Midas touch.
With your with your job choices.
But my my question is.
On the consumption side.
Constant cloud has been out for a few years now are you seeing a trend where customers are.
Over consume any more than they previously had and he talked about kind of annual commitments that they're making are they tending to make lower annual commitments because of the economy and therefore over consume more and then how does that manifest in the numbers.
Yeah that that that's a great question in that dynamic is present got rid attributed it to two facts internally, we have been really shifting or go to market to emphasize driving consumption more use cases coming onto the platform as quickly as possible even outside of the term of new commitments.
And and external yeah, there's there's a real market pressure and so companies are being very thoughtful about how you know.
What they commit to upfront how much they pay ahead et cetera. So both those dynamics are present and that is reflected in the really strong consumption results I think it's ultimately healthy. This is kind of be intention of these consumption models, certainly how we treat consumption vendors internally.
But it does show up you know when you look at the kind of <unk> split and <unk> versus kind of revenue performance for constant cloud.
Are they one quick follow up just on Fedramp. When did you guys expect to get February I'm authorized for counseling cloud.
We haven't given any public timeline for that it's obviously, a big focus for us and we will seem really strong results in the public sector, even though we're effectively kind of fighting with one hand tied behind our back. So we're very excited about that coming on line.
Thanks, very much and congrats D wrong.
Alright, Thanks, Jason we'll take our next question from Michael turn with Wells Fargo, followed by Goldman Mike.
Michael Please go ahead.
Thanks, I appreciate you taking the question I apologize.
Video operator seems to be not not too kind on my side, but quick questions. Just on cloud obviously, a big point of focus came on strong and Q2 I'm. Just wondering if you can add commentary on the progression you saw during the quarter visibility you have interest a year as a result, and then it looks like three Q guidance as now sequentially.
Down in touch as a starting point versus where Q2 came in was there anything unexpected that came through in Q2 or maybe just help us think through to forget progression of what you're expecting to see on cloud from here. Thanks.
Yeah, we we saw really great results on consumption, you know I would say, particularly set a larger cup customers drove kind of overperformance. There. We didn't think that that indicated necessarily equal overperformance on each subsequent quarter, but overall the trajectory for clouds consumption is very strong and we feel really good about it so.
I don't know if you want to add anything to that Stephan.
Yeah. The only other thing I would add is at the beginning of the year, we had called for sequential increases in cloud revenue and we've been delivering that in Q1, and Q2 guided seven and a half to 8 million for Q2 and.
And we came in $2 2 million above the bitcoin and arrange.
And and so when you when you take out a little bit of bad Overperformance and you look at our guide for Q3 that will that is a sequential increase relative to our original guide in queue too so the underlying strength and drive.
Business very strong and we are seeing adoption across cohorts and we're seeing very good adoption in the marketplace.
That's helpful. Just to follow up if I may on the subscription gross margin you continue to drive ramp you're now 79% can you just help us think through any further potential leverage they're in the trade off some total gross margin between the cloud mix and what you're seeing there.
Yeah, there's there's a number of factors that contribute I mean, there's kind of two things going on under the covers on one hand to the percentage that is constantly cloud has gone up and of course. It comes with a cloud being managed service has a lower gross margin than constantly platform, which is just pure software uhm at the same time counseling with clouds gross margin has been.
Rapidly improving and that's due to a number of factors, but in particular the improvements in core you know.
More emphasis on the multi tendency in the system improvements in the underlying hardware profile that we use improvements in the software stack really top to bottom to drive efficiency. You said, we're very excited by the the progress there I don't know if you want to add anything to that Stephan.
I'll just say, it's been a real bright spot our our progression in gross margin. It. It's a demonstration of the value that we're delivering to our customers and it's also a reflection of the fine engineering work engineering optimization work and also the discipline we have on on pricing. So it's been a real pause.
<unk> and we've been able to drive that gross margin higher on that pop up outside and the cough up blood for on site.
Thanks, Congrats to both of you are on and stuffing. Thank you. Thank you.
Thanks, Mike we'll take our next question from cash Brandon with Goldman Sachs, followed by Barclays.
Alright, Thank you very much.
J, a nice quarter Stephens will definitely Miss <unk> huge congratulations spread to watch budget could project for you over the past several you guys. So one for you J look at.
We thought we're gonna have a recession this year and it looks like with dodged, one if if economic conditions to stabilize how do you see conflict cloud versus spot for them not to make it one versus the other they both have great products, but when customers start to get back to priorities do you think we'll get back to.
Ah more platform upside or rather cloud upset because it sounds good I think the the on prime component of many software companies that have hybrid business models has taken a little bit more precedence I don't know why and Mcleod adoption generally has slowed a bit do you think that we go back about adoption <unk>.
Conditions to stabilize and one for Ya Stefan if I could.
Look at the club business <unk>.
The use cases are you getting basically identical use cases as to be on from our are you seeing a new set of use cases, it really is pulling away the cloud momentum in a different direction, maybe it's a different set of customers with a different set of industry. So instead of abuse cases different geographies I'll take this option to ask you a bit of a technical question <unk>.
We're gonna Miss Ya that a couple of months go anywhere else <unk> throw that out yeah, I put them put them to the test on the way out <unk>. Yes. It is a great question cash so yeah. I mean, it's it's a little bit speculative I I do think that you're onto something there though.
What we have seen is two behaviors, one I already alluded to which is this very strong consumption relative to commit so people just being thoughtful about commits but then actually using more than you know more than they had committed to you know I I do think there's also a set of customers that are being a little bit more thoughtful about the pace of their class.
Migration.
I've heard of people pulling back in China, we haven't seen that in our customer base like people are moving to cloud, but they're kind of trying to get the last dollar out of there on premise environment thoughtful about which workload moves and when a little bit more hesitant to have parallel spend and you know the result of that has I think has driven some of the success of.
Comparable platform. In addition to the public sector thing, which we alluded to it's not a bad thing for US is our strategy to be able to span all of these environments and connect them and we think that strength in one drive strength and the other and so we're we're happy to serve the customers and the environment that they're using.
That's very much our approach on the product side, but I do suspect that yet where we will see you kind of an acceleration are a little bit of a loosening of the purse strings and the I T budgets I do think you'd see a little bit faster push in the cloud and you know if that speculation were correct then that would probably drive our cloud business further.
Yeah, and as it relates to the second question I, just try and use cases Thursday traditional set of use cases that we've talked about a lot, but I'd like to just focus a moment on some of the the Jenny I am a I M. L. Use cases that we're seeing customers are really starting to do and have enjoying a number of things first.
As they are building real time context.
Data and using that to Paris chat interfaces were there with their customers you've seen them also provide product recommendations based off of demographics and buying patterns and we've also seen technology that deploys AI assistance to drivers and helping with sleet logistics and then finally I was a test.
We're also building a real time M. L N data science pipeline to power their new fraudulent action platform. So there are lots of use cases that.
Companies have already been using our technology for but then with the all the advances that are being made <unk> gonna be using our technology, even more so in the future.
Good luck with the next venture. Thank you so much great work with you Sir Thank you very much I appreciate it.
Thanks cash would take our next question <unk> with Barclays followed by Georgia.
And all of that to me as well as Stefan and <unk>.
Two quick questions first if you think about the clout momentum if you have at the moment, what do you see in terms of pipeline here in terms of what's going to trying to grow up going forward is that going to be more.
Existing in this case, it with heavier consumption or do you see like early signs of more people are going back to cash as questions of people will just thinking about like okay. I need. The next <unk>. What are you seeing dear that's a prescription and the second one is with the <unk> <unk> changes at <unk>.
<unk> is there any updates you have there in terms of that help that phone, except obviously, if the reference customer for you and it's important for you. Thank you.
Yeah, you know to the first question I want to make sure I understand it right either you're saying, what what's kind of pattern of consumption that we're seeing is it more use case driven or is it more you know something else that'll help me understand the kind of nuance.
So it's more like of a street or the is it <unk> is it more use cases or the streams getting bigger or is it just like all your project in different departments of <unk> fluffy customers. Yeah. Yeah. That's a great question. So yeah, I would say generally our expansion is driven by either new use cases or conversion of existing use cases.
That are using the open source.
They're obviously, there's some expansion of existing use cases like there's more data but of course, there could be less data and some other use case you know on net I don't know that businesses are just getting bigger at you know a large right you're over here. The other area of expansion is the new products capabilities that we're adding you know we have a consumption model.
As as later on customers can kind of in a very frictionless way use more of that for comfort cloud. Thus far it has been kind of largely driven by Costco, but we are expecting you know over time some of those other components to drive. So those are those are kind of the three vectors expansion in the use of capabilities expansion in the kind of raw volume of data and expansion in you.
Cases today, you know the spread of use cases is definitely the one the the drive six.
And then into the new relic question, yeah. They they've progressed in their deployment and you know we're seeing what we would expect out of out of their adoption.
Okay, Sir thank you.
Alright, Thanks for him I would take our next question from <unk> stomach with Deutsche Bank, followed by Piper Sandwich bread.
Thanks, very much nice quarter, and congrats Stefan will Miss you at consulate, but I couldn't think of a of a better more capable successor than real hot so congrats to you <unk> really excited to see you in the new role J you know on screen processing. It's good to hear the encouraging early feedback and in particular around the integration points with the rest of your.
Platform, you talked about still being in the early stages of <unk> adoption I Wanna make sure nothing's changed in terms of the timeline and impact that you initially expected when did the the deal and if you can remind us of any milestones we should look for in the years ahead to appraise your progress with flying.
Yeah.
Yeah. So yeah. We we are very pleased with the progress you know to go from kind of a standing start to having you know a real like clouds stream processing layer that customers can use as a big deal. It's currently in early access meeting it's being used by a handful of customers were working with them getting feedback it'll go into.
You know kind of open availability and then G E and those are kind of the milestones to expect from US you know and G E. As when it will start to take on production workloads, but to be clear with any cloud infrastructure. There is a longer ramp as you kind of reached the full completion of future sets are available across every cloud.
With every networking type that that will continue and then of course customers have to ramp their spin to the point, where it moves confluence numbers overall and that will happen use case at a time and so you have a certain amount of patience is important in these areas. You know this is what we saw with our topic of business, where you know at first it was a small thing in the class.
<unk> and then as we really hit that you know kind of a bright point on that maturity curb it ramped much faster uhm I think we can do that a little bit quicker with some of these additional components because they're a natural attached to kafka, but there still is a curve that ramps and so so yeah to your question where exactly on the schedule of it yeah. We originally intended.
Which is kind of amazing for such a complicated tougher project. We're really pleased with how the team is integrated and the product rebuilt is even better than than I imagined. So I'm I'm very excited about it but but yeah. We'll ramp you know over the course of next year, it really kind of contribute most meaningfully in 25.
Thanks for that and if I could just ask a follow up in something that I get asked about from investors. You know one of your small private competitors completed a series C capital raise recently and I've just seen many markets, where you have a venture back player that can come can enter and they'd be more easily afford to operate at a loss and pressure price any thoughts are up.
It's competitively and is this something that you're worried about an interface and the market. Thanks.
Mmm, Yeah, you're you're probably talking about red Red Panda, Yeah, Yeah, we we pay attention to any of the earlier competitors. We've had a sequence of those almost since the company started pulsar was the thing for Awhile and then kind of went away there's been other systems before that uhm. So we pay attention to all of them. We we compete very effectively with them.
You know you've been one of the customer stories today. It was actually a customer of errors that it was one of my reference customers that that's no customer of ours and so you know we feel good about that setup. Overall, if you look at what's happening in the space that were in theirs too big trends, but I think I.
Actually make it hard for really any competitor, but particularly a smaller competitor you. The first is this movement to the cloud any expectation on a true cloud Native service right, which is a really serious investment to build something like that the second is the broadening of this space from kind of just cough drops to a full data streaming platform like the full set of <unk>.
The ability to kind of think of it as you know going from word versus word perfect to Microsoft office right and you know if you look at those two trends, they're just very strongly prevalence in the world and they're they're actually hard for competitors to do it you know hard for some of the cloud players to do for a whole set of reasons, particularly hard for.
A smaller startup to do you know I think we're actually lucky to be off the scale to be able to sustain the investment to do both of those things right and kind of drive that progress forward and I think it's exactly where this space is going and so that that's the best that we've got and I I think that sets us up well against the full spectrum of the competitive land.
<unk> <unk>.
Excellent congrats all around thank you.
And perhaps we'll take our next question from <unk> Owens with Piper Sandler followed by me too.
Thanks, Shane and thanks, guys for taking my question J appreciate the commentary around patience with regard to stream processing and budgets, but for curious if you could provide.
Color around early adoption, just how long it takes some of these companies to migrate existing operations over to your services, we think about potentially that adoption curve yeah.
Yeah, there, there's kind of two patterns for adoption for US one is that.
<unk>, you use case of which there's plenty happening even in a tighter economy.
Kafka open source adoption continues to pay so many many use cases for that are actually just coming directly starting on our cloud that will be true for link in some of these other components as well and then the conversions and the conversion you know it depends you know the the.
Kind of bigger the setup that a company has the more complicated that is but but they often move it a bit at a time and so you know we don't have to just kind of eat the Apple all in one bite and so yeah that that timeframe depends there. There's companies are very disciplined and can move actually a very large set up you know in a couple of months, even though there may be hundreds of applications as <unk>.
You know areas without will take longer it really depends on the setup with customers. The nice thing about these additional D. S. P components. The the rest of the data streaming platforms is it has a very strong attached to kafka.
So the initial adoption need not be you know new customers coming from the streets it need not even be new use cases, it can kind of drive direct attach off what you're doing already with kaka and so it kind of pulls in and starts with our existing customers and the nature of these consumption models. You know this is their biggest strength right. There's there's obvious.
Say a ton of complexity with with consumption you know, it's it's very friendly to the customers and customers like it, especially in this kind of environment, but one of the superpowers, but I think AWS really proved is that ability to.
Expand and a low friction way to other components and particularly in this streaming space, where you know the core stream of data is the thing that everything else hooks onto its the thing you need governments for its the thing the connectors produce it's the thing that the you know Frank is processing, you know that kind of draws in those other components and so you know that's the first <unk>.
<unk> for US as you know get that attach right with your existing customer base up before we're kind of going out and trying to convert you know existing <unk> users.
Great. Thanks, and for Steffon appreciate the commentary and around where we're at the economy and some of the challenges that are out there, but maybe you could speak to us just about pop a funnel and what you guys are seeing from that perspective from a velocity perspective. Thanks.
Sure thing.
Pipeline, we had a really strong pipeline quarter last quarter, which is a good leading indicator and we also are measuring number of sign ups that we have for are pay as you go business and those continue to be a robust.
Mentioned over the last three or four earnings calls the progression of stages.
Stages from top of funnel all the way through committed contract and then ultimately through expansion et cetera.
Some of that business is just slowed down and we've been factoring that in to how we not only forecast our business on the top line, but we've also been making operational changes or an hour investing in the business and we we come at this from the lens of ensuring that we're we're driving that top line growth as high as we can but also.
Delivering that profitability that we've we've communicated in the street and we've been able to to do that so the the top a funnel metrics actually look pretty good but it's we're trying to increase the deal velocity and the conversion rates and and those are the things that our our team has been working on.
And I think about it like what Erica Stephanie and J and other folks in the organization are are spending their time on it if it says conversion rates, it's the deal velocity and and and we're making progress there and as I also mentioned in a prepared remarks to the extent that.
E economy improves uhm, we should benefit from that just like other companies like <unk>.
In the meantime, it's like we're navigating through and and ensuring that we're delivering on our commitments.
Alright. Thank you. Thank you.
Alright, we'll take our next question from framed Moscow is with them, it's Susan followed by Neil.
Alright, Saint <unk> will certainly Miss you being a part of conflict, but congrats are allowed on a very well deserved promotion J can you speak to the monetization opportunity for screen sharing both conservative landing more customers and driving more interconnected organizations. How are you expecting that this is going to <unk>.
Yeah, that's probably the hardest one to forecast what was shocking to me was how prevalent this pattern had become and how much work. It was for our customers to do it you know so despite the fact that they were doing a lot of this by hand with kind of accustomed code. They were writing just across every industry that seem to be popping up and that that was what made us really.
You know feel strongly enough that we needed to invest in productizing. It even in a time period, where we're operating relatively lately. The opportunity is really to drive this spread and so if you see what happens in a lot of these industries is there's a whole ecosystem of data flow and once the mechanism for that get set up.
It really doesn't change and tends to drive any new transfer provider spire that taps into that to also adopt the same layer and that kind of network effect. That's certainly something we would see within a company as we spin up and gets a scale at a certain point of time, you know you have to ask for permission not to you.
Confluent instead of to use compliment that's obviously a really good point to get Ya, you know being able to do that you know within an industry or within a sector is even better because that can drive the acquisition of new customers and that to me is the thing I'm. Most excited about you know more so than the kind of direct monetization, which is obviously an opportunity as well but.
That ability to kind of become you know a standard for the exchange of data in different sectors and industries.
Alright, it makes a lotta sense. Thanks, J and then a bit earlier in answer to another question step and talk about some of the AI oriented use cases that are occurring for comprehend along with this are you also see an uptick in January I P. O fees is that something that's really building or is it a little too early for that yet yeah.
Yeah, Yeah, we've definitely started to see that come up a lot more than our customers can more traditional machine learning was there is one of the driving use cases for a long time and you know now this has become a you know a very significant topic of interest for customers a lot of experiments happening. So so yeah, I think that's very promising for us.
Perfect. Thanks very much.
Alright, we'll go to Mike C goes with me to Max Boulevard Bank of America.
Thanks to the team forgetting me on here and I'll pass on the comments to step and will Miss working with you, but congratulations are all him and and stepping up to the CFO role here two two questions first on the on the cloud guidance that we have today for Q3 I think at the prepared remarks management alluded to maybe a small.
Set of customers, who drove some of that too cute performance and that's why we're seeing the incremental revenue growth and cops on cloud declining in two three versus Q2 again, the incremental growth, it's still growing but instead of at a lower pace versus what we saw in two Q. So my question is really can.
Can you help us think about the the volume of those customers that drove that two two outperformance and anything else that you can allude to whether it's a particular vertical or what specific use case or maybe more one time sculpted drove that that size will beat that we're looking at in Q2 here just for context, when we think about how it's flowing through in Q3.
<unk>.
Yeah. There there there was a set of customers that drove a portion of that that we alluded to you know different events in each case, but but yeah. You know some streaming service services that were kind of ramping up large large sporting events in visa Pacific that was bringing stuff online.
So there's.
A bunch of different factors that kinda led to a ramp up that we didn't think necessarily made sense to project forward you know an attorney, but <unk> you know we thought it was a great uptick in the business.
Got it got it and then one if I could ask.
Over to step in here, but on the guidance.
For the negative 10% operating margin guidance that we have for Q3 slight.
Slight erosion versus what we just saw in Q2 and I'm just trying to Saturday check that were there any delays and expenses that made me push from 22223, what can you help us think through why we are looking at a at a wider operating Louis I'm thinking about that mortgage in Q3 versus what we just just so out of the June quarter.
Yeah, I mean, there is.
What we're talking about is effectively roughly flat quarter on quarter, and what way way better than what we had originally thought or in Q3. So what we what we have going on is there is it S M.
You look at the top line growth you look at margin and we look at the key drivers as we construct the overall guidance and there was nothing that was pull forward or pushed out in in in queue to we're just forecasting are where our head count is gonna land tiny head count on it.
So, it's effectively flat quarter on quarter, and and way better than what we thought at the at the beginning of the year relative to where we thought operating marginally B and Q3 and we also raised numbers for you know.
Four Q for profit as well, so overall health or for the full year I should say silver always feel good about that.
Great. Thank you very much guys yep.
Thanks, Mike we'll take our next question from Brett sales with Bank of America, followed by Margaret.
Wonderful, thank Shane congratulations <unk> and and Stefan you'll be missed enjoyed working with you I wanted to ask a question about the partner channel. It was a key theme at at your at your Analyst day, So any any progress there or anything incremental here. It seems like it's it's kind of a new or not not a new focus but.
Incremental focus if you will on some of the I S fees and S. I sell any update their please.
Yeah, you know that that has been an area of investment and kind of increased focus for US you know maybe in the last six nine months and and it it's actually manifested in some pretty positive early signs you know a couple of ways. So a couple of Dsi's, where we've seen really strong traction and you know we think of that <unk>.
And use that can be a substantial you know tailwind overtime.
You know we've seen this actually reflected in the uptick in pipeline that Stephan called out you know that that was an area that was a little behind our expectations, maybe a year ago and is now.
Performing about you know about the plan now which has been really kind.
Got a strong turnaround in your area and so we were really happy to see so yeah. I think both of those are positive signs and of course kind of key discussions in the technology landscape, we announced.
A program you know around the technology partners and this is an area that you know I I think it's particularly strategic making sure that we have the integrations into all these different systems, either upstream or downstream that want to plug in.
Deliver streams of data out to everything else in an organization or pull it in and do some kind of analytics or a I or <unk>.
Machine learning on top of it so that that's a program that we've launched that has really seem strong demand and I think it was very et cetera.
Wonderful. Thanks, J one more if I may please when we think of the success you've had you know over over the over the years a lot of this is driven by the need for real time streaming and next generation applications, but I know there's also a good mix of deals here that involve modernization of of existing.
You know data data platforms, and providing that real time capability to a lot of legacy application. So just curious any observation there on that mix of you know deal activity coming from that new activity versus replacement and and refreshing modernization of existing infrastructure. Thank you yeah. There's <unk>.
That's exactly right, but you know our business has always been a mixture of connecting into the old and connecting into the new and you know I actually think it's kind of one of the secrets of our success. When you think about a lot of new technologies you know the the message behind it is ultimately like Hey, if you delete all the things that you felt over the years and rebuild it with us.
It'll be better right and the reality is is just not that practical for you know a large successful organization. It's running some major part of the economy on software they built over 30 years to delete it.
[laughter] and so the the really cool thing about data streaming and compliment is it's about how do you connect into all the old thinks the mainframes and relational databases and on premise systems. But then also how do you open that up and really create the backbone for the architecture that you want to have the new applications New systems are things that are.
Driving you know customer interactions with things that are helping you brown the business more effectively and you know that's kind of proven out you would see that in our adoption that kind of digital native customers repeat your at some of them, they're starting from scratch. There's no mainframe upload project. There you know this is the architecture that they want to have but you would also see in our customers. These very traditional organs.
<unk> been around for you know decades, or or you know more and have built up software states over that time and so yeah. You know I I think with a little pressure on the economy, you'd probably see somewhat fewer of the kind of net new applications, but in many ways that kind of hook into the system that you have.
The push honest you know modernization for the sake of efficiency becomes more important and that is you know those are all use cases P C.
Great to hear thanks, so much J yeah.
Alright.
<unk> I guess it will take on last question from starting out with <unk> Hey.
Hey, guys. This is billing fitzsimmons on for for Sterling Audi. It was talk to one of the prepared remarks that there are still some macro choppiness out there two questions and you can tackle them. However, however, you like first maybe expanding on some of the things that were already said what changes have you made from go to market standpoint over the last couple of quarters and adjusting to macro and how.
It has that impacted the pipeline adopt funneled today, and then separately when you look across your customer verticals and customers by geography are there any material changes, you've you've seen either either positive or negative.
In terms of consumption over the over the last quarter.
Yeah <unk> to the first question in terms of what changes have we made it it's probably too long with the list to go through I mean, just you know in great detail I think we went through virtually every aspect of it to go to market and looks at hey, what's the efficiency of marketing spend you know what are the customer targets that are most likely to convert.
<unk>, what's holding up in this market, how representing Chi C O analysis, and showing the value of our offering and how are we doing that not just for new deals but for customers. We already have to make sure that they feel very confident in the investment that they made and that they're comfortable with future expansion that list goes on and on and on so that that's been a very.
<unk> you know I think any kind of economic pressure shows and really clear relief, where their steps and in a way. That's good it actually lets us improve and get better you know to some extent you're kind of learning to swim faster because you're swimming against the stream and so I you know I think that has been in a healthy thing for the company but.
This is you know environment, a few years back where there was a certain tailwind and all kinds of things worked that you know maybe you shouldn't the.
The you know looking at sectors and parts of the economy. Yeah. We we've seen which is interesting pretty strong trends in Ah Mia in APAC you know that's been positive.
One of the things we touched on in this call was our commercial business has done really well through this they've had to adopt you know they have a pretty strong chunk of the you know tech companies, both maybe kind of newly public private that are under pressure and so they've really adjusted kind of how they serve that market, but they are.
Continue to show success, which I think is really promising. So so those are a few of the things that we've noticed there's always some kind of shift industry to industry, but we're kind of very broadly across industry. So most of that doesn't show up in something that we can move the business overall, but but yeah. Those are those are a few of the highlights.
Perfect. Thank you alright. Thank you everyone that concludes today's earnings call. Thanks, again for joining us have a good one bye.
Okay. Thanks, a lot.
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