Q3 2023 Confluent Inc Earnings Call

Hi, everyone welcome to the comparable in Q3 2023 earnings conference call I'm ashamed Z from Investor Relations and I'm joined by Jay Crafts, co founder and CEO and Bill have Chevron CFO.

During today's call management will make forward looking statements regarding our business operations sales strategy financial performance and future prospects, including statements regarding our financial guidance for the fiscal fourth quarter of 2023 fiscal year 2023 in fiscal year 'twenty 'twenty four.

These forward looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.

Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-Q filed with the SEC.

We assume no obligation to update these statements after today's call except as required by law 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. We use these non-GAAP financial measures internally to facility analysis of our financial and business trends.

And for internal planning and forecasting purposes.

These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP.

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 IR website at investors <unk> com front that I O and with that I'll hand, the call over to Jay. Thanks, Shane Good afternoon, everyone and welcome to our third quarter earnings call. We delivered a solid Q3 exceeding the high end of total.

Operating margin and EPS guided range is still challenging macroeconomic environment.

Shane Xie: Hi, everyone. Welcome to the Confluent Q3 2023 earnings conference call. I'm Shane Xie from Investor Relations, and I'm joined by J Kreps, co-founder and CEO and Rohan Sivaram, CFO. During today's call, management will may fall looking statements regarding our business, operations, sales strategy, financial performance and future prospects, including statements regarding our financial guidance for the fiscal fourth quarter of 2023, fiscal year 2023 and fiscal year 2024. These four looking statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements.

Total revenue grew 32% to $200 million non-GAAP operating margin improved 22 percentage points and non-GAAP EPS turned positive for the first time the key milestone.

We've now driven 36 percentage points of operating margin improvement over the last two years I want to thank our entire employee base with a tremendous progress here, though confluent cloud remains the fastest growing part of our business with revenue up 61% to $92 million. It fell slightly below our guidance. Our Q4 revenue outlook is impacted as well, we expect revenue growth of <unk>.

21%, 22% with cloud revenue sequential out of $6 million representing growth of 43% the lower cloud revenue this quarter an impact to guidance for Q4 is primarily driven by two factors first the impact from two large digital native customers. One online gaming company move workloads back to their own data center and one of our largest.

Shane Xie: Further information on risk factors that could cause actual results to differ is included in a most recent from 10Q file 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-gap basis, and all comparisons are made on a year-of-year basis. We use these non-gap financial measures internally to facilitate the analysis of a financial and business trends and for internal planning and forecasting purposes. These non-gap financial measures have limitations and should not be considered in isolation from, or as a substitute for financial information prepared in accordance with gap.

Customers ramp slower as they are in the process of being acquired we believe consumption from these two customers was impacted by their company specific events and accounts for roughly 50% of the expected consumption shortfall for Q4 second the continuing macro pressure, including the ongoing conflict in the middle East, where Israel as a top 10 country for us and the possible U S. Gulf.

<unk> shutdown, both of which are the uncertainty and disruption in particular segments, specifically, we've seen slower organic subset, resulting from a slower rate of new use case additions in some part of our customer base Ron will provide more details on our results and guidance in the later section of the call.

Shane Xie: A reconciliation between these gap and non-gap financial measures is included in our earnings press release and supplement of financials, which can be found on our Iowa website and invests.confluent.io.

Shane Xie: And with that, I'll hand it over to Jay. Thanks Shane.

I want to spend some time now focusing on our critical change, we're making to drive growth beyond just the friction in the current market environment. The critical project for confluence is capture the massive market opportunity in Australia. This is a $60 billion market, where we're still just scratching the surface of even the existing open source Kafka usage and we have additional expanse.

J Kreps: Good afternoon everyone and welcome to our third quarter earnings call. We delivered a solid key three, exceeding the high end of total revenue operating margin and EPS guided range and still challenging macro economic environment. Total revenue grew 32% to 200 million non-gap operating margin improved 22 percentage points and non-gap EPS turned positive for the first time, the key milestone. We've now driven 36 percentage points of operating margin improvement over the last two years.

<unk> opportunities for Blink, our connectors and data governance as I outlined in the earnings call last time.

Critical to our execution against this opportunity is leveraging our go to market engine to rapidly land new customers expand new workloads and ensured the adoption of our full set of product capabilities to this and we'll be completing the transition to Orient our cloud business around consumption. This will make cloud revenue rather than bookings or committed spend the.

J Kreps: I want to thank our entire employee base for the tremendous progress here. Though confluent cloud remains the fastest growing part of our business with revenue up 61% to 92 million, it tells slightly below our guidance. Our Q4 revenue outlook is impacted as well. We expect revenue growth of 21 to 22% with cloud revenue sequential add of 6 million representing growth of 43%. The lower cloud revenue this quarter impacts to guidance for Q4 is primarily driven by two factors.

<unk> goal of the go to market organization for Confluent cloud. This was a planned transition. Indeed, we began changes in this direction. This year, but it's the transition will be significantly accelerating heading into 2024 to explain what this means let me start with a little background in the traditional world of on premise software customers would make big upfront commitments.

J Kreps: First, the impact from two large digital native customers, one online gaming company moves workloads back to their own data center. And one of our largest customers ramps slower as they are in the process of being acquired. We believe consumption from these two customers was impacted by their company specific events and accounts for roughly 50% of the expected consumption shortfall for Q4. Second, the continuing macro pressure, including the ongoing conflict in the Middle East, where Israel is a top 10 country for us, and the possible US government shutdown, both of which add uncertainty and disruption in particular segments. Specifically, we've seen slower organic consumption resulting from a slower rate of new use case additions in some part of our customer base.

Salespeople worked with the customer to scope these commitments and were paid as a percentage of the resulting bookings.

The marketing organization measured pipeline based on these commitments and every internal system and processes oriented around measuring and managing the bookings that resulted.

There was some misalignment between customer and vendor because customer might end up over purchasing but this was masked by the fact that the rest of the stack such as servers that ran the software. We're also fundamentally upfront an inelastic purchases.

With the advent of the cloud and the elasticity and flexibility. It offered customers. This model had to evolve cloud has a utility like model where services are metered as are used however in the early days. The go to market engine for cloud infrastructure software largely remains as it was previously selling customer commitments or credits that overlaid this dynamic usage.

J Kreps: Rohan will provide more details on our resulting guidance in the later section of the call. I want to spend some time now focusing on a critical change we're making to drive growth beyond just the friction in the current market environment, the critical project for confluence is capture the massive market opportunities. Streaming. This is a $60 billion market where we are still just scratching the surface of even the existing open source Kafka usage.

Alignment between customer and vendor improved somewhat but the vendor still had incentive to maximally scope customer commitments over the last couple of years businesses like Mongo DB Snowflake data dog in the Hyperscale or have all transitioned their go to market to a fully consumption based model and this model the customer and the go to market organization are both oriented around the actual.

J Kreps: And we have additional expansion opportunities from Plink, our connectors and data governance as I outlined in the earnings call last time. Critical to our execution against this opportunity is leveraging our good market engine to rapidly land new customers, expand new workloads and ensure the adoption of our full set of product capabilities. To this end, we'll be completing the transition to orient our cloud business around consumption. This will make cloud revenue rather than bookings or committed spend the primary goal of the good market organization for Confluent Cloud. This was a planned transition. Indeed, we began changes in this direction this year, but it's a transition will be significantly accelerating heading into 2024 to explain what this means.

Service usage not the upfront commitment.

This fully aligns the customer value realization with the vendors revenue.

Less obvious from the outside is how this completely up and the sales and marketing model pipeline is no longer oriented around maximum customer commitment, but rather new logos and new workloads salespeople have compensated for getting it upfront booking but rather for what a customer actually uses finding new workloads and driving new product adoption. This is an absolute win for customers and also a huge.

J Kreps: Let me start with a little background in the traditional world of on premise software customers would make big upfront commitments salespeople worked with the customer to scope these commitments and were paid as a percentage of the resulting bookings. The marketing organization measured pipeline based on these commitments and every internal system and process was oriented around measuring and managing the bookings that resulted. There was some misalignment between customer and vendor because customer might end up over purchasing, but this was masked by the fact that the rest of the stack, such as servers that ran the software, were also fundamentally upfront and inelastic purchases.

Win for vendors, who are actually able to grow faster by removing much of the uncertainty and risks through customer purchasing.

With confluent cloud now at nearly 50% of our revenue having at our over 140% and continuing rapid growth. It's time for <unk> to complete our transition to this fully consumption based model. We've already made the transition to usage based pricing that bills for what is used but today. Our go to market is still primarily oriented around booking customer commitments.

The final step in our consumption journey is to now fully align our go to market operations to the consumption motion. This directly attaches our go to market efforts to cloud revenue into our customers' value realization. This is one of the most important possible growth levers for confluence.

J Kreps: With the advent of the cloud and the elasticity and flexibility it offered customers, this model had to evolve. Cloud has a utility-like model where services are metered as they are used. However, in the early days, the go-to-market engine for cloud infrastructure software largely remained as it was previously, shelling customer commitments or credits that overlaid this dynamic usage. Alignment between customer and vendor improved somewhat, but the vendor still had incentive to maximally scope customer commitments.

It is also necessary that we do this now as we've seen across the industry. This last year economic pressure combined with the changing norm and cloud means customers are increasingly reluctant to make large multi year commitments ahead of their usage. This means over the course of this year the misalignment between our subscription base good market and the natural buying behavior of customers has increased.

J Kreps: Over the last couple of years, businesses like MongoDB, Snowflake, DataDog, and Hyperscalers have all transitioned their go-to-market to a fully consumption-based model. In this model, the customer and the go-to-market organization are both oriented around the actual service usage, not the upfront commitment. This fully aligns the customer value realization with the vendor's revenue. Less obvious from the outside is how this completely upends the sales and marketing model. Pipeline is no longer oriented around maximum customer commitment, but rather new logos and new workloads.

Creating a drag on our cloud growth. This has shown up in the dislocation between <unk> and cloud revenue, but ultimately affects both as our interaction with customers are directed in a way that is out of sync with the customers' natural buying behavior. We believe this change will turn what is currently a drag into a tailwind.

This is not a new plan for confluent, we'd originally planned to make this shift over a three year period, beginning with steps. This year. However in light of the change we've seen in buying behavior will be accelerating this and completing the transition next year.

J Kreps: Sales people aren't compensated for getting an upfront booking, but rather for what a customer actually uses, finding new workloads and driving new products adoption. This is an absolute win for customers and also a huge win for vendors who are actually able to grow faster by removing much of the uncertainty and risk from customer purchasing. With Confluent Cloud now at nearly 50% of our revenue, having NRR over 140% and continuing rapid growth, it's time for Confluent to complete our transition to this fully consumption-based model.

In practical terms here's what this means first beginning in Q1 of FY 'twenty four we're shifting from our current model, we're 10% to 15% of cloud sales compensation is based on consumption to a model where 100% of cloud sales compensation is based on incremental consumption and new logo acquisition, we will keep the vast majority of our customer.

Revenue under committed contract as we do today. However, we will not be attempting to get commitments ahead of the usage, rather commit amounts will be customer driven as customers choose to commit in exchange for greater discounts.

J Kreps: We've already made the transition to usage-based pricing that builds for what is used, but today our go-to-market is still primarily oriented around booking customer commitments. The final step in our consumption journey is to now fully align our go-to-market operations to the consumption motion. This directly attaches our go-to-market efforts to cloud revenue into our customer's value realization. This is one of the most important possible growth levers for Confluent. It is also necessary that we do this now.

Second we're fully orienting our field facing teams towards landing, new customers and driving new workloads with customers.

<unk> will be adapting our product and pricing to enable customers to frictionlessly try and adopt new products, enabling easier lands and adoption of new features.

Finally will be undergoing a significant reworking of our systems for planning growth building in measuring pipeline and forecasting performance as all shifts drive directly off cloud revenue.

J Kreps: As we've seen across the industry this last year, economic pressure combined with the change in norm in cloud means customers are increasingly reluctant to make large multi-year commitments ahead of their usage. This means of the course of this year, the misalignment between our subscription-based good market and the natural buying behavior of customers has increased, creating a drag in our cloud growth. This has shown up in the dislocution between our PO and cloud revenue, but ultimately affects both. Because our interaction with customers are directed in a way that is out of sync with the customer's natural buying. Behavior. We believe this change will turn what is currently a drag into a tailwind.

A number of our cloud oriented peers have made this transition to very positive effect. So the path and benefits are clear like the transition to the cloud. We began several years ago, we expect to emerge stronger on the other side more aligned with our customers and better positioned to capture the $60 billion opportunity in front of us in.

In September we held current 2023, the only industry event dedicated to the data streaming ecosystem. It was a high energy events and a fantastic illustration of the excitement and innovation around data streaming events included speakers from BMW asset nationwide Snowflake, Uber and many others as well as thousands of practitioners who gathered to discuss the state of the art.

J Kreps: This is not a new plan for Confluent, we'd originally plan to make this shift over a three-year period beginning with steps this year. However, in light of the change we've seen in buying behavior, we'll be accelerating this and completing the transition next year.

<unk> data stream.

One of the things I'm. Most proud of is the velocity of product innovation. The team is sustained over this last year and I think our announcements at current a great illustration of this.

J Kreps: In practical terms, here's what this means. First beginning in Q1 of FY24, we're shifting from our current model where 10 to 15% of crowd sales compensation is based on consumption. [inaudible] Company. And finally, we introduced Data Streaming for AI, a set of new partnerships that span vector databases, CSPs and SIs. It also includes new product capabilities, including the complement AI assistance that will turn natural language inputs into helpful suggestions and code. We expect this initiative to address the demand we're seeing across our customers who are building innovative new AI applications.

We announced a new tier of Kafka cluster enterprise clusters, which offer many of the advantages of our dedicated clusters like private networking and enhanced security but include incidence elasticity in our served multi tenant off our core stack. This allows a better price point for customers and significantly lower serving costs for confluence these lower cost.

Clusters are perfectly aligned to our consumption transformation since a lowered the entry point price, but scale up automatically as you need them.

Data portal is an important new addition to our stream governance suite that brings our vision for discoverable and reusable data streams to the forefront of confluence cloud.

The excitement around slink at current was palpable flink sessions were among the highest rated and most attended sessions of the entire conference highlighting the hunger Kafka users have for fleet.

That's why we're so pleased with the launch of link public preview in console cloud since the announcements we've seen incredible uptake with hundreds of customers opting into the preview and trying out our cloud native and survey with Splunk offering the.

The addition of <unk> strengthens our position as the only complete data streaming product, we bring flink together with the connectors that capture streaming data the stream itself and kafka and the governance capabilities to manage streaming data across an organization. Each of these capabilities strengthens the other and the combination comprise what we believe will be the most important data platform and a modern.

Company.

And finally, we introduced data streaming for AI set of new partnerships expand vector databases Csp's <unk>. It also includes new product capabilities, including the confluence AI assistance that will turn natural language inputs into helpful suggestions and code.

We expect this initiative to address the demand we're seeing across our customers who are building innovative new AI applications of <unk>.

Example of this is notion.

<unk> is an AI powered connected workspace, where modern teams can create and share documents take notes manage projects and organized knowledge all in one place given notion strong growth of new data streaming platform was needed to meet its rapidly expanding needs. However, due to the lean engineering team. They required a fully managed service to focus on product development rather.

Managing Kafka, they began using confluent cloud for real time data flows were internal analytics pipelines into supply data into data lakes. After realizing the value. It provided notion expanded the usage of confluence cloud to enhanced product features including search automation and notion AI now notions customers can automate tasks and real time, such as adding summaries extracting.

Key points and consolidating action items and meeting notes.

This is only the beginning as notion continues to innovate and actively explore house data streaming can power new AI applications.

Before turning things over to Ron I wanted to reiterate a couple of key points. We're incredibly excited about the tailwind to the business blinked data governance AI on the rest of the data streaming platform components add to our business and while it may cause some short term headwinds I firmly believe our accelerated transformation to a fully consumption oriented business will put us in <unk>.

Incredibly strong position to drive the monetization of these new offerings I've never been more confident in our ability to be the leader in the emerging $60 billion data streaming market with that I'll turn things over to Ron.

Thanks, Jane Q3 demonstrates our ability to drive efficient growth and a challenging macroeconomic environment.

Key highlights include robust subscription revenue growth, coupled with proactive management of rate and pace of investments of which drove record high gross margin 20, plus points of operating margin improvements and our fast positive non-GAAP EPS quarter I'd like to take a moment to thank our employees and partners for that.

J Kreps: A great example of this is Notion. Notion is an AI-powered connected workspace where modern teams can create and share documents, take notes, manage projects, and organize knowledge all in one place. Given Notion's strong growth, a new Data Streaming platform was needed to meet its rapidly expanding needs. However, due to the lean engineering team, they required a fully managed service to focus on product development rather than managing Kafka. They began using Confluent Cloud for real-time data flows for internal analytics pipelines and to supply data into data lakes.

J Kreps: After realizing the value it provided, Notion expanded the usage of Confluent Cloud to enhance product features, including search automation and Notion AI. Now Notion's customers can automate tasks in real-time, such as adding summaries, extracting key points, and consolidating action items and meeting notes. This is only the beginning, as Notion continues to innovate and actively explore how data streaming can power new AI applications.

Contributions and delivering these key milestones for the company.

Turning to Q3 results total revenue grew 22% to $200 2 million exceeding our guidance subscription revenue grew faster up 36% to 108 to $9 3 million within subscription confluent platform revenue growth re accelerated to 19% ending the quarter.

At $97 7 million or 49% of total revenue and was driven by continued strength in regulated industries as companies in those industries are still early in the journey of moving to the cloud.

<unk> cloud revenue grew 61% to 91 6 million slightly below our guidance of $92 2 million and ended the quarter at 46% of revenue compared to 38% of revenue a year ago and 44% last quarter.

J Kreps: Before turning things over to Rohan, I wanted to reiterate a couple of key points. We're incredibly excited about the tailwinds of the business. Link, Data Governance, AI, and the rest of the Data Streaming platform components add to our business. While it may cause some short-term headwinds, I firmly believe our accelerated transformation to a fully-consumption oriented business will put us in incredibly strong position to drive the monetization of these new offerings. I've never been more confident in our ability to be the leader in the emerging $60 billion Data Streaming market.

<unk> called out earlier cloud revenue performance in the quarter was modestly impacted by two large customers one large online gaming customer who moved workloads back to their own data center from the public cloud as part of a broad internal cloud strategy review.

Rohan Sivaram: With that, I'll turn things over to Thanks Jay. Q3 demonstrates our ability to drive efficient growth in a challenging macro economic environment. Key highlights include robust subscription revenue growth, coupled with proactive management of rate and pace of investments, which drove record-high gross margin, 20 plus point of operating margin improvements, and our first positive non-gap EPS quarter.

And one of our largest customers who ramped slower than expected as they are currently in the process of being acquired.

Additionally, we saw lower than expected consumption and a few other large U S digitally native customers, while they select customers did have an impact on Q3, especially in the last few weeks of the quarter, we expect to see a greater impact throughout Q4 and next year.

I'll cover more on this in a second.

Rohan Sivaram: I'd like to take a moment to thank our employees and partners for their contributions in delivering these key milestones for the company. Turning to Q3 results, total revenue grew 32% to 200.2 million, exceeding our guidance. Subscription revenue grew faster up 36% to 189.3 million. Within subscription, Confluent Platform revenue grew 3 accelerated to 19%, ending the quarter at 97.7 million, or 49% of total revenue, and was driven by continued strength in regulated industries, as companies in those industries are still early in their journey of moving to the cloud.

Turning to the geographical mix of revenue revenue from the U S grew 25% to $119 4 million.

Revenue from outside the U S grew 43% to $80 8 million we.

We continue to be pleased with the relative balance of our business around the world move.

Moving on to rest of the income statement I'll be referring to non-GAAP results unless otherwise stated.

Gross margins reached a record high of 76, 4% up 540 basis points. This translates to 81 subscription gross margin up 320 basis points. Despite a continued revenue mix shift to cloud.

Gross margin outperformance was driven by continued improvement in the unit economics and in product optimizations of our cloud business and our R&D investments and core up our cloud native engine of our confluence cloud offering.

Rohan Sivaram: Confluent Cloud revenue grew 61% to 91.6 million, slightly below our guidance of 92.2 million, and ended the quarter at 46% of revenue, compared to 38% of revenue a year ago, and 44% last quarter. As Jay called out earlier, cloud revenue performance in the quarter was modestly impacted by two large Optimus, one large online gaming customer who moved workloads back to their own data center from the public cloud as part of a broad internal cloud strategy review.

Turning to profitability and cash flow operating margin improved 22 percentage points to negative five 5%.

Representing our fifth consecutive quarter of more than 10 points of improvement.

Q3 operating margin outperformance was driven by disciplined spending and ROI focused investment philosophy across every function of the company.

Rohan Sivaram: And one of our largest customers who ran slower than expected as they are currently in the process of being acquired. Additionally, we saw lower than expected consumption in a few other large US digital native customers. While we select customers did have an impact on Q3, especially in the last few weeks of the quarter, we expect to see a greater impact throughout Q4 and next year. I'll cover more on this in a second.

And we are pleased to achieve our first positive net income per share of two cents for Q3, using $303 9 million basic and 347 million diluted weighted average shares outstanding.

Fully diluted share count under the Treasury stock method was approximately $355 4 million free.

Free cash flow margin improved 24 percentage points to negative six 5%. We ended the third quarter with $1 $87 billion in cash cash equivalents and marketable securities.

Rohan Sivaram: Turning to the geographical mix of revenue revenue from the US crew 25% to 119.4 million revenue from outside the US crew 43% to 80.8 million. We continue to be pleased with the relative balance of our business around the world. Moving on to rest of the income statement, I'll be referring to non-gap results unless otherwise stated. Total gross margins reached a record high of 76.4% up 540 basis points. This translates to 80.1 subscription gross margin up 320 basis points, despite a continued revenue mix shift to cloud.

Turning now to other business metrics in Q3, we added 18 net new customers 41 customers with 100 gig are more in the IRR and eight customers with $1 million or more in <unk>, bringing our total customer count to approximately 4910 up 16% or 100, K plus customer count to one.

185 up 25% and our million dollar plus customer come to 155 up 38%.

And in the quarter was healthy just under 130% and our RF, our hybrid and cloud where both comfortably above 130% with cloud and are continuing to be the highest gross retention rate remained strong and was above 90%.

Rohan Sivaram: Gross margin outperformance was driven by continued improvement in the unit economics and in product optimizations of our cloud business and our R&D investments in Cora, the cloud native engine of our Confluent cloud offering. Turning to profitability and cash flow, operating margin improved 22 percentage points to negative 5.5%. Representing our fifth consecutive quarter of more than 10 points in improvement. Q3 operating margin outperformance was driven by discipline spending and ROI focused investment philosophy across every function of the company.

Consistent with <unk> comments about the drivers behind the shift to consumption RPM was $824 1 million up 24% current RVO estimated to be 65% of <unk> was $535 1 million up 31%.

Rohan Sivaram: And we are pleased to achieve our first positive net income per share of two cents for Q3 using 303.9 million basic and 347 million deluded weighted average shares outstanding. Fully deluded share count under the treasury stock method was approximately 355.4 million free cash flow margin improved 24 percentage points to negative 6.5%. We ended the third quarter with 1.87 billion in cash cash equivalence and marketable securities. Turning now to other business metrics in Q3, we added 80 net new customers.

Rohan Sivaram: 41 customers with 100 K or more in ARR and 8 customers with 1 million or more in ARR bringing our total customer count to approximately 4,910 up 16%. Our 100 K plus customer count to 1,185 up 25% and our million dollar plus customer count to 155 up 38%. NRR in the quarter was healthy just under 130% NRR for hybrid and cloud were both comfortably above 130% with cloud NRR continuing to be the highest gross retention rate remains strong and was about 90%.

Subscription based go to market and the new buying behavior of customers, which creates a drag in our consumption growth.

We believe R accelerated moved to a fully consumption oriented comp model for confidence cloud will turn this drag into a tailwind for our business.

Rohan Sivaram: Consistent with J's comments about the drivers behind the shift to consumption, RPO was 824.1 million up 24%. Current RPO estimated to be 65% of RPO was 535.1 million up 31%. RPO Growth was impacted by a decline in both average deal sizes and average contract duration. A continuation of the trends we had called out last quarter. In the current macro environment, we believe customers have less appetite for larger upfront commitments and prefer consumption against smaller commits, reflecting a consumption first trend in how our customers derive value from confluent.

Turning now to guidance for the fourth quarter. According twenty-three, we expect revenue to be in the range of $204 million to $205 million representing growth of 21% to 22%.

Cloud revenue to be approximately $97.5 million, a sequential out of $6 million representing growth of 43% and accounting for approximately 48% of total revenue based on the midpoint of archived <unk>.

non-GAAP operating margin to be in the range of zero percent to 1% and non-GAAP net income per share to be approximately five cents.

Additionally, we expect the free cash flow margin to be in the range of zero to 1%.

Rohan Sivaram: Now turning to our Q4 outlook, we have factored in our guidance that impact of the following. First, we expect to have a full quarter impact from the two large customers mentioned earlier, whose consumption is impacted by their company specific events around the shift of workloads back to on-prem and an acquisition. We estimate that these two customers account for roughly 50% of the expected consumption shortfall in Q4. Second, the macro uncertainty, including the ongoing geopolitical tensions, will likely persist.

For the full year 2023, we expect revenue to be in the range of 768% to $769 million representing growth of 31%.

non-GAAP operating margin to be approximately negative 9%.

And non-GAAP net loss per share in the range of negative <unk> two zero cent.

Looking ahead I would like to provide an early read into our outlook for next year or fiscal year 24 preliminary outlook assumes the impact of a continued volatile macroeconomic and geopolitical environment.

Rohan Sivaram: Impacting new use-case deployments into production and driving lower than expected consumption. As Jay discussed earlier, the current macro has increased the misalignment between our subscription-based go-to-market and the new buying behavior of customers, which creates a drag in our consumption growth. We believe our accelerated move to a fully-consumption oriented comp model for confluent cloud will turn this drag into a tailwind for our business. Turning now to guidance. For the fourth quarter of 2023, we expect revenue to be in the range of 204 to 205 million representing growth of 21% to 22%.

The dynamics mentioned earlier for queue for continuing into 2024.

And the risks associated with our transformation to fully consumption oriented business if.

If macro to improve we would expect to benefit from it but it is too early to tell.

Given these factors for the full year 2024, we expect revenue to grow approximately 22% year over year non-GAAP operating margin to breakeven improving approximately nine percentage points year over year. This is despite a two to three point headwind associated with our move to a consumption based sales.

Rohan Sivaram: Cloud revenue to be approximately 97.5 million, a sequential add of 6 million representing growth of 43% and accounting for approximately 48% of total revenue based on the midpoint of our guide. Non-gap operating margin to be in the range of 0% to 1% and non-gap net income per share to be approximately 5 cents. Additionally, we expect the free cash flow margin to be in the range of 0 to 1%. For the full year 2023, we expect revenue to be in the range of 768 to 769 million representing growth of 31%. Non-gap operating margin to be approximately negative 9% and non-gap net loss per share in the range of negative 1 cent to 0 cent.

Permission plan, resulting in higher upfront expense recognition.

And we expect free cash flow margin to breakeven.

I'd like to highlight a few things about our consumption transformation.

Despite potential near term topline impacts on our fiscal year 2004 outlook, we expect the transformation will enhance our ability to drive durable and efficient growth over both the midterm in long term anvil put us in a stronger position to capture our 60 billion market opportunity, we believe subscription revenue, which captures ACB from.

Confident platform and consumption from confluent cloud will be the best indicator of success. Starting Q1 next year. We will include subscription revenue in our key financial metrics and move our quarterly and annual revenue guidance metric to subscription revenue and consistent with that <unk> will be less relevant as a forward.

Looking indicator given the greater emphasis on consumption or acb's commits for cloud.

Rohan Sivaram: Looking ahead, I'd like to provide an early read into our outlook for next year. Our fiscal year 24 preliminary outlook assumes the impact of a continued volatile macroeconomic and geopolitical environment. The dynamics mentioned earlier for Q4 continuing into 2024 and the risk associated with our transformation to a fully consumption oriented business. If macro were to improve, we would expect to benefit from it, but it is too early to tell. Given these factors for the full year 2024, we expect revenue to grow approximately 22% year-over-year, non-gap operating margin to break even improving approximately 9 percentage points year-over-year.

We expect our non-GAAP operating margin midterm target of 5% to 10% and long term target of greater than 25% to be firmly intact and for free cash flow margin to continue to trend roughly in line with operating margin.

In closing we are pleased with delivering a solid Q3 in a challenging environment or net and gross retention rates remained strong reflecting the durability and residents CFR growth, we remain committed to driving growth and improving profitability, while transforming our cloud business to be fully consumption oriented and we are excited about capturing.

Our market opportunity ahead.

Rohan Sivaram: This is despite a two to three point headwind associated with our move to a consumption based sales commission plan resulting in higher upfront expense recognition. Foundation, and we expect free cashflow margin to break even. I'd like to highlight a few things about our consumption transformation. Despite potential near-term top line impacts on our fiscal year 24 outlook, we expect the transformation will enhance our ability to drive durable and efficient growth over both the midterm and long term and will put us in a stronger position to capture our 60 billion market opportunity.

Now Jan I will take your questions.

Thanks, Ron to join the Q&A. Please raise your hand.

And today, our first question will come from Sanderson with Morgan Stanley followed by torture change. It. Please go ahead yeah. Thank you for taking the questions I had to I guess, one for J, what if Iran. J, the spending environment hasn't been particularly great kind of all year and so I wanted to get a sense of your outside of those two customers.

Maybe a little bit idiosyncratic like what's changed in that environment. When did you start to see the change in the quarter and how much of that would you attribute to macro versus just sales execution.

Rohan Sivaram: We believe subscription revenue, which captures ACV from Confluent platform and consumption from Confluent Cloud will be the best indicator of our success. Starting Q1 next year, we will include subscription revenue in our key financial metrics and move our quarterly and annual revenue guidance metric to subscription revenue. And consistent with that, RPO and CRPO will be less relevant as a forward-looking indicator, giving the greater emphasis on consumption over ACV based commits for cloud.

Yeah, Yeah. It's a good question. So obviously the two customers are kind of a significant impact that particular circumstances in age I do think we felt kind of pressure on the number of net new software projects that are just getting funded throughout the year and we've talked about that yoga building over time that's.

The motivation for this.

Full shift to consumption that I talked about.

Rohan Sivaram: We expect our non-gap operating margin midterm target of 5 to 10 percent and long term target of greater than 25 percent to be firmly intact and for free cashflow margin to continue to trend roughly in line with operating margin.

When I think about our execution.

There's always something in one customer or another that can be done better but the biggest systematic thing is really making sure. We're lining up to drive the adoption of new projects, making sure that we're attaching to each thing that's happening. This is something we watched in pure companies and it's worked really well for them and you know I think just because we're a younger or.

Rohan Sivaram: In closing, we are pleased with delivering a solid Q3 in a challenging environment. Our net and gross retention rates remains strong, reflecting the durability and resiliency of our growth. We remain committed to driving growth and improving profitability while transforming our cloud business to be fully-consumption oriented. And we are excited about capturing our market opportunity ahead.

<unk> or maybe a year or two behind in that journey and what we saw over the course of the year is definitely customers adapted to this environment. The combination of pressure on it budgets along with the switch and the behavior of our peers has really led people to kind of consume and then commit as at work and you read.

Unknown Attendee: Now, GNI will take your questions. Thanks, Ron. To join the Q&A, please raise your hand. And today our first question will come from San Jacen with Oregon Stanley followed by Deutsche. San Jac, please go ahead. Yeah, thank you for taking the questions. I had two, I guess, one for Jay and one for Rohan. Jay, the spending environment hasn't been particularly great kind of all year. And so I wanted to get a sense of, you know, outside of those two customers that, you know, maybe a little bit idiosyncratic, like what's change in the environment?

Really want to have then you're a good market lotion focused on the consumption side of things like really driving the adoption and you use cases that becomes.

Extra important and settle on the execution side I think that's absolutely. The biggest change we can make and we're just very excited about the impact that can happen I mean, obviously, there's some adjustment period as you go through switching all your internal systems in.

A number of the different definitions from pipeline to calm, but cetera and of course needed adjusting some of the sales notions, but if you think about why we're doing it it really is to be able to a line that you attaching to the next new project, making sure that that has you know streaming and confluent as part of it making sure that these new components.

Unknown Attendee: When did you start to see the change in the quarter? And how much of that would you attribute to macro versus just sales execution? Yeah, it's a good question. So obviously, the two customers are kind of a significant impact, but particular circumstances in each. I do think we've felt kind of pressure on the number of net use software projects that are just getting funded throughout the year. And we've talked about that, you know, kind of building over time.

The data streaming platform plank in the connectors in the governance capabilities, making sure the doctor actually adopted and the customers are really consuming that yeah, that's far and away. The biggest lever we feel like we have to drive you know additional growth.

Unknown Attendee: That's the motivation for this, you know, full shift in consumption that I talked about. I think when I think about our execution, you know, there's always something in one customer or another that could be done better, but the biggest systematic thing is really making sure we're lining up to drive, you know, the adoption in new projects, making sure that we're attaching to each thing that's happening. This is something we've watched in pure companies and it's worked really well for them.

Understood and then run for for you I guess the question is in terms of your initials <unk> 2024, I guess my question is it that four Q4 of 2023.

21, or 22 per cent and then for next year, you're guiding essentially sustained growth and you know how did you come up with the the 22 per cent number and do you see any risks or sustained grill <unk> 2024, given what they're pulling out from our sales force transition perspective from the macro perspective, just some level of.

Unknown Attendee: And, you know, I think just because we're a younger organization, we're maybe a year or two behind in that journey. And what we saw over the course of the year is definitely customers adapted to this environment, the combination of pressure on IT budgets, along with, you know, the switch in the behavior of our peers has really led people to kind of consume and then commit as it were. And you really want to have then your good market motion focused on the consumption side of things, like really driving the adoption.

A little clarity on how you set up the the Twenty-twenty poor guy.

Great question Sanchez, Yeah, when when you're thinking about 40, 44, guys kind of breaking two three budgets starting off with you know we called out the two large customers.

And back although customer specific applications, but that will have an impact interview for as well as 2024.

Unknown Attendee: In the use case, that becomes, you know, extra important. And so on the execution side, I think that's absolutely the biggest change we can make. And we're just very excited about the impact that can have. I mean, obviously there's some adjustment period as you go through switching all your internal systems and, you know, a number of the different definitions from pipeline to comp, etc. And of course, even adjusting some of the sales motions.

The second category is around the macro which I'd say a combination of geopolitical exposure to Israel a couple.

With the slowdown in the new case of that <unk> and the third category is the consumption transformation and as changes called out anytime you go through a transformation like this that's going to be this adjustment factor and we're trying to prudently taken that impact of that into our guidance. So thank.

Unknown Attendee: But if you think about why we're doing it, it really is to be able to align that to attaching to the next new project, making sure that that has, you know, streaming and confluent as part of it, making sure that these new components of the data streaming platform flink and the connectors and the governance capabilities, making sure that that gets adopted and the customers are really consuming that, you know, that's far in a way the biggest level we feel like we have to drive, you know, additional. Growth.

Taking a step back these are the three drivers that impacted out items, but when you think about the first half was the second half we expect like the second half to be better off slightly that in the first half purely because the conjunction transformation will have I would say a larger impact in the first half of the year I mean I also wanted to call out signed you up that as we are.

Exiting 2024, there'll be a decent amount of Tailwinds first of all the conjunction transformation, which we expect will be behind us and which will reduce the friction between I'll go to market teams as well as how our customers want to buy our products second I mean, we'll have a decent amount of productivity behind us with that.

Unknown Attendee: Understood. And then, Rohan, for you, I guess the question is in terms of your initial view into calendar 2024. I guess my question is that for Q4 2023, you're guiding at 21 to 22% and then for next year, you're guiding, you know, essentially sustained growth and, you know, how did you come up with the 22% number and do you see any risk for sustained growth going into 2024, given what they're calling out from a Salesforce transition perspective.

<unk> about six months and a couple of other unlocks from the data streaming platform perspective, coupled with Fedramp an AI. So we feel that exiting 2024, I feel pretty good with where we are and you know just in general from a long-term perspective.

Unknown Attendee: From a macro perspective, just a little, little clarity on how you set up the 2020 for a guy. Great question, Sanjit. Yeah, when, when thinking about our 2024 guy, a kind of put it into three buckets, starting off with, you know, we called out the two large customers that had impact, although customer specific implications, but that'll have an impact into Q4 as well as 2024. The second category is around the macro, which I'd say a combination of geopolitical exposure to Israel coupled with the slowdown in the new cases that we've been seeing.

Okay I'll leave it there and what's the the rest of the name of your first few questions. Thank you alright. Thank Sanjay we'll take our next question from Zelenak with torture followed by Donna.

Unknown Attendee: And the third category is the consumption transformation. And as she just called out, anytime you go through a transformation like this, there's going to be this adjustment factor and we're trying to prudently bake in that impact of that into our guidance. So, you know, taking a step back, these are the three drivers that impacted our items. But when you think about the first half was a second half, we expect like the second half to be better off slightly than the first half purely because the consumption transformation will have, I would say, a larger impact in the first half of the year.

Thank you so much Shane and it certainly is tough out there and really appreciate the disclosure and granularity that you've given us.

<unk> to hone in on the one customer that you said is moving back into their own data center.

Because that's not something we typically here we've heard about this notion of repatriating cloud cloud workloads, but it's hard to actually find it so.

Context that you can add as to why on Earth that might be happening why that particular customer of <unk> used constantly platform at that point and any reason to believe that this is the beginning of a trend.

Yeah. It is a great question. So yeah like like you you you always hear a little bit about this like move out of the crowd and by and large we don't see it.

Maybe in the history of the company I could cite one or two examples where that's happened, but yeah I don't think it's a broad based trend it's.

Unknown Attendee: I mean, I also want to call out Sanjit that as we are exiting 2024, there'll be a decent amount of tailwinds. First of all, the consumption transformation, which we expect will be behind us. And we should reduce the friction between our go-to-market teams as well as how our customers want to buy our products. Second, I mean, we'll have a decent amount of product till we're behind us. We'll have fling, we'll have G8 about six months in and a couple of other unlocks from the data streaming platform perspective, coupled with FedRAMP and AI.

Really motivated by cost you know when you think about that kind of pressure on it budgets, it's far and away. The most significant H and the digital native sector. You know these are companies that in some cases are cutting you know 30 per cent of spent and so that that means very significant adjustments and this particular company that is coupled with a strategy.

Moving stuff out of the cloud into their data centers.

Cost cutting confluent kind of gets dragged along with that you know we're in discussions with them uncomfortable platform, but you know that kind of overall shift is not something that's kind of what specific as part of a broader strategy.

Unknown Attendee: So we feel that exiting 2024 feels pretty good with where we are and, you know, just in general, from a long term perspective. Okay, I'll leave it there and then I'll let the rest of the office for questions. Thank you. All right. Thanks, Sanjit. We'll take our next question from Brett Zelnick with Deutsche, Follow by Goldman. Brett, thank you so much, Shane. And it certainly is tough out there and really appreciate the disclosure and granularity that you've given us.

Maybe just to follow up for both yourself and and perhaps.

The new enterprise cluster that you've announced that current it sounds like it's really powerful how much might this present the headwind to consumption as it seems you are making customers way more efficient requiring fewer reserves instances and is that something that you're contemplating the guy that you've given us. Thanks yeah.

Unknown Attendee: I wanted Jada to hone in on the one customer that you said is moving back into their own data center because that's not something we typically hear. We've heard about this notion of repay trading crowd cloud workloads, but it's hard to actually find it. So any context that you can add as to why on earth, that might be happening. Why that particular customer wouldn't then use confluent platform at that point and any reason to believe that this is the beginning of a trend.

Yeah, I mean of course that and all these other factors are are baked into what we've given but we we think that's a tailwind. So you know when we think about are lining to the consumption transformation a lot of that is on the go to market side, but it's also about the product we want people to be able to land with the least amount of friction possible and then we wanna make expansion as easy and automatic as possible.

And so it's it's hard to stress how much better. It is when we move things you know from an interesting support that's running dedicated to that customer to something Multitenant. What happens is the customer experience gets much better because the clusters just to spend instantly as you need it there's no kind of manual into.

Unknown Attendee: Yeah, it's a great question. So yeah, like you, you always hear a little bit about this, like move out of the cloud and by March, we don't see it. You know, maybe in the history of the company, I could cite one or two examples where that's happened, but yeah, I don't think it's a broad based trend. It's definitely motivated by costs. You know, when you think about the kind of pressure on IT budgets, it's far in a way the most significant in the digital native sector.

Location, you have to make and secondly, you know it's it's obviously very positive for accomplishment in terms of the efficiency. So it allows us to do something that's a better deal for the customer, but you know really a much better deal for accomplish such as well. So it's it's kind of positive on both sides and you know our goal in this is take a lot of this friction you know out.

Unknown Attendee: You know, these are companies that in some cases are cutting, you know, 30% of spent. And so that that means very significant adjustments. In this particular company that is, you know, coupled with a strategy of moving stuff out of the cloud into their data centers and, you know, Kafka and confluent kind of gets dragged along with that. You know, we're in discussions with them on confluent platform, but the, you know, that kind of overall shift is not something as specific as part of a broader, with Gusters.

The system in adoption and expansion make it as easy as possible to land. The first use case and make it as automatic as possible for customers to expand so yeah. We we expect it's a tailwind even though you may be starting at a lower initial price point.

Thank you.

Alright. Thanks, we'll take our next question from cash Rangan with Goldman followed by Wells Fargo cash.

Thank you. Thank you very much it's always tough to go after Brad stomach or ask such questions, but I'll I'll try my best J I think there was a comment made that as you exit this transfers to the company is going to be in a better position. So can can you just freak out for us how structurally you're able to prosecute et cetera.

More easily because of the switch and you'll go to market bottle and secondly, just to what was the Devil's advocate is the cloud platform missing certain things that you have to lower the barrier by giving an alternative to.

To to do to go easy on the consumption cause I wonder what did this customer giving customer saw that that they felt compelled to put it in the data center and not get the benefits of the cloud is there something missing.

Platform site itself by way of functionality whatnot that discuss what might've seen <unk>.

That we might be missing here that you plan to introduce in the functionality. So it becomes less of.

Of of friction.

Going forward. Thanks, so much yeah, let let me address both the first I think is more bigger picture like Hey, how does this change you know just just change the market or our ability to address the market you know how and why so yeah I'll I'll start with that big picture questions. So like yeah, I think the opportunity and streaming is as big as ever probably better even than it was a year.

[noise] ago, I mean, she just talk to customers the level of excitement in this space the adoption of string processing all of that is really at the forefront of People's minds. We just had courage our conference had a number of customer conversations. They're you know this is something people are absolutely thinking about in the current environment all of these forward looking.

<unk> transformations and our customers they have to moderate the pace right. So whether it's cloud adoption the move to see real time streaming all of this stuff is happening a little slower but this is absolutely right at the top of their agenda. So.

I don't think any aspect of that changes and then yeah exiting 24, what are kind of detail as I think raw and did a good job of speaking to this so you know you want it to be the case that the energy we're devoting in our go to market organization is about finding these use cases, making sure they're adopting with a full part of the.

Product really consuming all the aspects of the data streaming platform plank. The connectors are kafka offering all of it and you're doing that as rapidly as possible across the organization. So you know the.

What what's important to get right and I just get all the systems pointing in that direction and then yeah that really becomes a driver for growth. What you don't want is.

Something where you're very focused on the amount of the commitment and trying to get customers to commit ahead of these projects that kind of puts them into too much of you know analysis paralysis of trying to scope out every new application you're gonna Bill how much is it gonna consume exactly commit exactly to that amount that ended up being a secondly, wasted time versus just.

Getting them going and getting them to use the product I think you've seen this change it effectively all the peer companies you know for those that start with an on premise operating as we do they have to introduce it gradually you know as they have enough cloud revenue to really make it makes sense as we do now right for those who were kind of born with.

Ah cloud only offering you know this is perhaps the native thing they started with or perhaps there was some adjustment earlier in the life cycle. So you know that's the change that's why we're doing it had positive impact for all the piers. We expect it will have that exact same impact for us and of course as we prosecute that we want to make sure we get the impact as soon as possible right. So we've.

I think prudently baked some impact into the first half of the year that we think as we kind of change all our systems. There's some adjustment period involved in that but yeah, as where you know exiting the year. We think that's absolutely a tailwind and that combines with in many ways accelerates. These new product offerings that we're adding the connectors governance blink offerings are really come.

<unk> to maturity you know throughout the course of that year. Some of the security unlocks. It you know like work with what we're doing on Fedramp also being able to address other regulated industries that such a significant unlock.

Yeah. Those those things are really powerful in allowing us to take on more use cases more completely with less work from customers and of course. These are mostly line items, a customer purchases directly so, allowing us to increase to spend with customers.

And then yeah is there is there something missing that we would make changes like this I don't think so I mean, if you. If you look at pier companies of course, there's always more we can do in our product and we continue to invest and innovate, but this idea just a lining to consumption and trying to make that is low friction as possible, that's actually really important for us and especially.

The the shift of workloads into multi tendency, it's kind of just net positive either even though you that that entry price can be a little bit lower the cost to us is so much lower that it just disproportionately much better it's exactly what you want to have happen and that takes a lot of the friction out of the conversation and this is really important in tighter.

In environments, where customers.

Customers have to think not just about the T C O and the pay off but exactly that transition cost in time and do they have the ability to get from here to there you want to make that a no brainer. So the customers can just get up and get going.

And we look at all the open source usage, we Wanna go screwed that up as quickly as possible.

Mmm cash just to add to what Jay said the customer will be referenced that is not a confidence specific decision that was just abroad. I would say architectural decision that they made and we happen to be impacted by it just wanted to share that.

Color Yeah, Yeah in case, that's not clear like the decision to start moving workloads into your data centers typically something much broader than you know confluent itself.

Do you have some obstacle set for other customers who might be contemplating this kind of thing to make sure that they don't do it the future I I just don't think it's a <unk> you know like every.

Every year, you hear about one or two companies that do something like this and every year. The total spend on cloud as a percentage of I T spend goes up and so I I just don't think it's a broad based trend you did that one I do think is a specific instance in that customer you know if you think about what's the kind of you know overall pressure that causes and stuff like that it is.

Unknown Attendee: And then, yeah, is there, you know, is there something missing that we would make changes like this? I don't think so. I mean, if you, if you look at peer companies, of course, there's always more we can do in our product and we continue to invest and innovate, but this idea of just a lining to consumption, trying to make that as low friction as possible. That's actually really important for us. And especially the shift of workloads into multi-tenancy, it's kind of just net positive, you know, even though, you know, that entry price can be a little bit lower, the cost to us is so much lower that it's just disproportionately much better.

This kind of pressure on efficiency and spending companies do different things to try and get that this is what day they happen to pursue so the right adjustment to us is not something where we advocate for customers not to move back into their data centers. The right adjustment is this consumption transformation like really line up you know make it as easy as possible to expand it attached to projects that.

Unknown Attendee: It's exactly what you want to have happen. And that takes a lot of the friction out of the conversation. And this is really important in tighter environments where, you know, customers have to think not just about the TCO and the payoff, but exactly that transition cost and time and do they have the ability to get from here to there. You want to make that a new banner. So the customers can just get up and get going.

It's gonna be the thing that really drives us forward kind of broadly across the customer base.

Alright, Thanks cash we'll take our next question from Might've turned with Wells Fargo, followed by J P. Morgan.

<unk>.

Hey, Thanks, I appreciate you taking the questions J I want to go back to some of the comments on the cost side of our customer discussion, but I appreciate the detail if you're breaking out is there anything new that you're seeing from an optimization standpoint, it's impacting the spend profiles of existing customers and you made some reductions the storage costs. The current so I'm wondering if that's.

Unknown Attendee: We look at all the open source usage. We want to go scoop that out as quickly as possible. And cash, just to add to what Jay said, the customer will be referenced. That was not a confluence specific decision. That was just a broad, I would say, architectural decision that they made and we happen to be impacted by it. Just wanted to share that color. Yeah, yeah. In case that's not clear. Like the decision to start moving workloads into your data centers, typically something much broader than, you know, confluence.

Something it all impacts customer spend and expectations and subsequent period.

Yeah, Yeah, I mean customers continually optimize their environments, you know I would say, what we're kind of reacting to more is making sure we get all the new projects right. So if you think about two forces that are happening in cloud right now what is more about optimization of existing usage. There's of course some of that in our customers at all times, but the other.

Unknown Attendee: And you have obstacles set for other customers who might be contemplating this nutty kind of thing to make sure that they don't do it in the future. I just don't think it's a broad, you know, every, every year, you hear about one or two companies that do something like this. In every year, the total spend on cloud as a percentage of IT spend goes up. And so I just don't think it's a broad based trend.

Thing is this how many net new workloads either for a production system like ours I think it's more about the new workloads and it is about optimization of environments and so that's that's kind of where our focus is when you think about what we're doing it relieves. This consumption notion is really about making sure you land and attached to you know everything that's going on in the organization.

Unknown Attendee: And, you know, that one I do think is a specific instance in that customer. You know, if you think about what's the kind of, you know, overall pressure that causes stuff like that, it is this kind of pressure on efficiency and spending companies, you different things to try and get that. This is what they, you know, they happen to pursue. So the right adjustment to us is not something where we advocate for customers not to move back into their data centers.

And then on the storage size, yeah, that'd be similar to the Enterprise club you know clusters. These are efforts that are designed to accelerate consumption, particularly when you think about flink and stream processing. It becomes important to you know not just processed the data once but if you change your <unk> logic be able to.

Unknown Attendee: The right adjustment is this consumption transformation like really line up. You know, make it as easy as possible to expand and attach to projects. That's going to be the thing that really drives us forward kind of broadly across the customer base. All right. Thanks, Cass. We'll take on next question from Michael turn with Wells Fargo followed by JP Morgan Michael. Thanks, Shane. I appreciate you taking the questions. Jay, I want to go back to some of the comments on just the cost side of customer discussions.

Go back and reprocessed. It again, so the incentive to want to store data becomes much higher income flowed and we want to make sure that doesn't become cost prohibitive as customers go after that so in part we're trying to set ourselves up for you know this preview release of think that we just did is that becomes J. We want to have a cost structure that makes sense with the stream crossed.

And capabilities and we think the result is gonna be net positive in terms of how much data you know companies or story.

Unknown Attendee: I appreciate the detail if you're breaking out. Is there anything new that you're seeing from an optimization standpoint that's impacting the spend profiles with existing customers. And you made some reductions, the storage costs that current, I'm wondering if that's something that all impacts customer spend and expectations and subsequent periods. Yeah, yeah, I mean, customers continually optimize their environments, you know, I would say what we're kind of reacting to more is making sure we get all the new projects.

Okay. That's helpful. Just the fall on if I may on the go to market changes, you're making around consumption can you just help characterize how big are natural to change that is from the sales side and and maybe <unk>. If you have a view on it that impacts visibility into the cloud <unk>, you'd expect going forward, either favorably or or or less favourably. That's all for ya.

Thank you.

It is it is a big change right. So if you think about how an enterprise software company works in this traditional model everything really is organized around booking a commitment. That's what pipeline is that's what the sales motion tracks. That's the line item in sales force and you kind of are changing all that where the thing you're going after is the use case.

Unknown Attendee: Right. So if you think about two forces that are happening in cloud right now, one is more about optimization of existing usage. There's of course some of that in our customers, you know, at all times, but the other things is how many net new workloads are there for a production system like ours. I think it's more about the new workloads than it is about, you know, optimization of environments. And so that's that's kind of where our focus is when you think about what we're doing.

The thing that you're driving as consumption. The definition pipeline is different so there's a big change you know it's not you know it's.

Unknown Attendee: It really is this consumption motion is really about making sure you land and attach to everything that's going on in New York. Organization. And then on the storage side, yeah, that, you know, similar to the enterprise, you know, clusters, these are efforts that are designed to accelerate consumption, particularly when you think about fling and stream processing, it becomes important to, you know, not just process the data once, but if you change your logic, be able to go back and reprocess it again.

It's not like the cloud transition we went through that was a really big change. This is an adjustment that we're kind of factoring into the first half of the year you know our desire and the thing we're working towards his you know hit that as smoothly as possible like we're doing this because we think this is absolutely positive Friday the thing that will allow us to.

Grow faster, but when you make a bunch of changes all at once you you want a factor that and you're gonna be prudent about how you do that and that's why we've made the adjustment. This wasn't a new plan like we're not doing this purely in a reactive where where you know we got halfway through the year and we were like Oh, let's change everything you know we had laid out a three year plan.

Unknown Attendee: So the incentive to want to store data becomes much higher in conflict, and we want to make sure that doesn't become cost prohibitive as customers go after that. So in part, we're trying to set ourselves up for, you know, this preview release of fling that we just did as that becomes GA, we want to have a cost structure that makes sense with the stream processing capabilities, and we think the, you know, results is going to be net positive in terms of how much data come, you know, companies are storing.

How we were gonna do that we were in your one and we were gonna do a little bit more next year, and then a little bit more of the year after but realistically when we just looked at what had happened to customer buying behavior like how our customers behaving with regard to these consumption models and then how are we set up to work with them, we just realized.

Unknown Attendee: Okay, that's helpful. Just follow on if I may on the good market changes you're making around consumption. Can you just help characterize how big or natural to change that is from the sales side, and maybe Rohan, if you have a view on if that impacts visibility into the cloud trends, you'd expect going forward, either favorably or or less favorably that's also useful. Thank you. Yeah, it is, it is a big change, right?

Hey, this is not a line that does not make sense to slow roll. It we should just do it fast you know, maybe it's a little bit more disruptive.

The very beginning of the year, but I think you get to something that positive much much faster in that world and it's in some sense easier than having you know 111 leg on each horse for an extended period of time.

Unknown Attendee: So, you know, if you think about how an enterprise software company works, you know, in this traditional model, everything really is organized around booking of commitments. That's what pipeline is, that's what the sales motion tracks, that's the line item in sales force, and you kind of aren't changing all that where the thing you're going after is the use case, the thing that you're driving is consumption, the definition of pipeline is different.

And Michael your question around visibility.

I'd say that when you look at W off the wall and then all scenario where customers are still committed a head.

Obviously, you have the visibility of <unk> hot and avoid.

Unknown Attendee: So there's a big change. Now, it's not, you know, it's not like the cloud transition, we went through that was a really big change. This is an adjustment that we're kind of factoring into the first half of the year. You know, our, you know, desire and the thing we're working towards is, you know, hit that as smoothly as possible. Like we're doing this because we think this is absolutely a positive, right?

One of consumption, it's always trying to predict what the customer is going to do it's not radical revenue. It's always a follow up call. If you need to predict what your customer needs to do and how to accompany solid they're essentially trying to do some predictive models by multiple factors.

I think that color.

The new World of course, what we are expecting and what we think is going to happen is the customer commitment is still going to be there, but they're not gonna be committing ahead of time, it's just gonna be connecting to your existing levels. So how do we get the predictability I haven't <unk> alluded.

Unknown Attendee: It's a thing that will allow us to grow faster. But when you make a bunch of changes, all at once, you, you want to factor that in, you want to be prudent about how you do that. And that's why we've made the adjustment. It wasn't a new plan, like we're not doing this purely in a reactive way where, you know, we got halfway through the year and we were like, oh, let's change everything.

You would have to like.

We get the predictability by understanding what are the use case, they're gonna drive so the consumption transformation and all the work that we are gonna do here.

Unknown Attendee: You know, we had laid out a three year plan for how we were going to do that. We were in year one. And we were going to do a little bit more next year and then a little bit more the year after. But realistically, when we just looked at what had happened to customer buying behavior, like how are customers behaving with regard to these consumption models. And then how are we set up to work with them.

<unk> I'd say added visibility into the works dreams, which will help us predict revenue in a much better motto and that's one of the reasons why I called out in my prepared remarks that going forward subscription revenue will probably a better indicator of the health of the business.

Unknown Attendee: We just realized, hey, this is not aligned. It does not make sense to slow roll it. We should just do it fast. You know, maybe it's a little bit more disruptive, you know, at the very beginning of the year. But I think you get to something that positive much, much faster in that world. And it's in some sense easier than having, you know, one, one, one leg on each horse for an extended period of time.

And you can see exactly why it is right like you know we work with a customer we tried to scope out every workload over the next few years and commit to lock that in you of course, there's some predictability like in the two years, we know what the minimum may I have to spend is but if we're successful yeah. They should be growing their consumption must faster than that curve anyway and.

The effort of trying to really think of each application and how it's going to be used in the exact usage pattern and all the uncertainty that pushes onto the customers actually just really hot and so taking that more out of the equation and just having customers.

Unknown Attendee: And Michael, you have question around visibility. I'd say that when you look at the view of the world in an old scenario, where, you know, customers are still committed ahead. Obviously, you have the visibility of our view and CRBO. But in a world of consumption, it's always trying to predict what the customer is going to do. It's not a radical revenue. It's always it follows a curve. You need to predict what your customer needs to do.

Really doing a customer driven way with a customer walks in the right level of commitment based on what they know they're you know doing that's effectively with all the beer companies have done is worked very successfully for them and that allows you to them really Orient. The go to market organization around finding those use cases, rather than getting people that kind of <unk>.

Unknown Attendee: And how do companies solve it? They're essentially trying to do some predictive models by multiple factors that predict that curve. In the new words, of course, what we are expecting and what we think is going to happen is the customer commitment is still going to be there, but they're not going to be committing ahead of time, it's just going to be committing to your existing levels. So how do we get the predictability?

Recommit to them.

Thank you alright, Thanks, Micheal, we'll take our next question from pendulum Flora with J P. Morgan followed by Bank of America.

Hey, Hey, guys. Thanks for taking the question one clarification on the gaming company that you were talking about can you help me understand what would that company coin committed contracts that moved to open source stomach contracting to constantly self managed what was the transition exactly yeah. Yeah. So so this was you know.

Unknown Attendee: I'll share a little bit to like, we get the predictability by understanding what are the use case they're going to drive. So the consumption transformation and all the work that we are going to do here will provide us, I'd say, added visibility into the workstream. Which will help us predict revenue in a much better manner. And that's one of the reasons why I called out in my prepared remarks that going forward subscription revenue will probably be a better indicator of the health of the business.

Set of applications running out of the clouds running on constantly cloud that's moving into their data center initially on open source Dot com.

Got it understood. Okay, Uhm, let's clear one question on Flink in general.

We have spoken to a lot of your partners and it sounds like without Flink and this is more of a high level question people are using kafka streams <unk> with a Java based applications, which is glaring into you confident clusters right. That's a compute that is not being captured by canceling today Uhm I'm assuming.

Unknown Attendee: And you can see exactly why it is, right, like, you know, we work with a customer, we try to scope out every workload over the next two years and commit to lock that in. You know, of course, there's some predictability, like in the two years, we know what the minimum they have to spend is, but if we're successful, you know, they should be growing their consumption must faster than that curve anyway.

Kind of allows you to capture those those compute but then we also seeing UWS kind of coming up with their manage pulling service right I'm trying to understand.

Unknown Attendee: And the effort of trying to really think of each application and how it's going to be used in the exact usage pattern and all the uncertainty that pushes on to the customers actually just really high. And so taking that more out of the equation and just having customers, you know, really doing the customer driven way with customer locks in, you know, the right level of commitment based on what they know they're, you know, doing.

You are constantly being evil now that you have you own the data persistence layer and the processing as a whole can you actually provide offer something which is more than you know a point product slink service that might be in the market. Yeah. We we absolutely can write the check.

Unknown Attendee: That's effectively what all the peer companies have done, it's it's worked very successfully for them. And that allows you to then really orient the good market organization around finding those use cases rather than getting people to kind of pre commit to them. Thank you. All right, thanks, Michael, we'll take our next question from Ginchlin for a with JP Morgan followed by Bank of America. Thank you. Great. Hey, hey, guys, thanks for taking the question.

Challenge in the streaming world has been for a long time customers or last kind of piecing together the parts of their own to build a data streaming platform. So you get Cock then maybe you add on some fling thing that you get somewhere else and then the parts don't work together like the security bottles of different the governments and catalogs of data are different.

It's all different so it's kind of left as an exercise for the reader to put those things together that that's not the recipe for success right. We we think in this area customers wanted integrated so just you know in what we demonstrated at courage Alrighty I think we've taken an amazing steps so unified security model across all of this it handles all the connectivity.

Unknown Attendee: One clarification on the gaming company that you're talking about. Can you tell me understand, was he was that company on committed contracts that moved to open source, committed contract moved to. Confluent self-manage, what was the transition exactly? Yeah, yeah, so, so, you know, this was, you know, a set of applications running out of the cloud running around. Confluent cloud that's moving into their data center initially on open source stock. Got it, understood, okay.

You know unified model of data if you go and create a new stream in Kafka. It's available there for you in Flint you don't have to go and set recreate it and it's like again, you know the ability to actually just seamlessly use these two together and do it without having to pre allocated anything you can go.

Unknown Attendee: That's clear. One question on flink in general. Um, we have spoken to a lot of the partners and and it sounds like without flink. And this is more of a high level question. People are using Kafka streams on AWS with a Java based application, which is querying into your. Confluent clusters, right. That's a compute that is not being captured by Confluent today. I'm assuming flink kind of allows you to capture those those compute.

Issue Aquaria against your your cockpit cluster, it'll scale up and run that processing and scale back down to zero cost if it if it finishes all.

Already that integration is leaps and bounds further than anything that's been out there I think in the streaming rubbing integrating both the screen and the processor and so if you think about hey, what you know.

Unknown Attendee: But then we also seeing AWS kind of coming up with their managed flink service, right. I'm trying to understand. Confluent being able now that you have you own the data persistence layer and the processing layer as a whole. Can you actually provide or offer something which is more than, you know, a point product. Flink service that might be in the market. Yeah, we absolutely can, right. You know, the challenge in the streaming world has been for a long time.

What are our advantages in doing this like stepping back to the question behind the question.

I think the the reason we feel like we have a lot of ability to succeed in this you know beyond any other competition first of all Frank is this platform. The has been incredibly successful that everybody wants second we have the ability to integrate that stream with the processing and if you think about the model for data systems. That's just much easier you can buy a.

Unknown Attendee: Customers are left kind of piecing together the parts their own. To build a data streaming platform. So you get Kafka and maybe you add on some flink thing that you get somewhere. And it the parts don't work together like the security models of different. The governance and catalogs of data are different. It's all different. So it's kind of left as an exercise to the reader to put those things together. That's not the recipe for success, right.

Database and parts were the core layer was separate from the storage engine you can piece it together yourself, but that just doesn't seem like the winning formula, It's obviously and very concretely a hassle today.

And then finally, one of the things. We're seeing is that people are thinking about this processing and streaming together and that's moving upstream and organizations and so when we think about any competition in this space most of it tends to come from different destinations systems, but increasingly the processing is kind of happening at the sourcing going out to all the destinations so structure.

Unknown Attendee: We think in this area customers wanted it integrated. So just, you know, in what we demonstrated at current already. I think we've taken an, you know, amazing step. So unified security model across all of the handles all the connectivity. You know, unified model of data. If you go and create a new stream in Kafka, it's available there. Or you inflink, you don't have to go and set, recreate it and inflink again.

<unk> those are the three factors that we think give confluent a unique advantage in this our expertise and blink and just the fact that we have the core people driving that forward you know the ability to combine it with kaka the kind of tea facto standard for the stream and really provide synergy between those things and then structurally. The fact that you know the processing of data is move.

Unknown Attendee: You know, the ability to actually just seamlessly use these two together and do it without having to preallocate anything. You can go issue a query against your, your Kafka cluster. It'll, you know, scale up and run that processing and scale that down to zero cost if it, you know. Finishes. So, already that integration is, you know, leaps and bounds further than anything that's been out there, I think in the streaming world, the integrating both the stream and the processing.

<unk> upstream to the source, where the stream is created which allows us to bring together that combination at the right time.

Understood. Thank you so much <unk>.

<unk>, we'll take our next question from <unk> Bank of America, followed by William Black.

Wonderful Thanks, Shane Hi, everybody I I just wanted to ask a question here on this transition here, maybe one for you raw and you know should we think about this this headwind if you will subsiding in the one year anniversary from the from the change or is there. Some other way to think about the timing of when.

Unknown Attendee: And so, if you think about, hey, what, you know, what are our advantages in doing this, like stepping back to the question behind the question. You know, I think the reason, you know, we feel like we have a lot of ability to succeed in this, you know, beyond any other competition. First of all, you know, Flink is this platform that is bending incredibly successful that everybody wants. Second, we have the ability to integrate that stream with the processing.

[noise] headwind kind of bottoms out if you will.

Yeah, that's a great question and as a very short and the prepared remarks.

There are a couple of headlines heading into 2024, and which we spoke about a couple of customers macro and the consumption transformation and as you think about the shape for next year, we feel that the consumption transformation will have a <unk>.

Unknown Attendee: And if you think about the model for data systems, that's just much easier, you know, you can buy a database in parts where the query layer was separate from the storage engine, you could piece it together yourself, but that just doesn't seem like the winning formula. And it's obviously in very concretely a hassle today. And then finally, one of the things we're seeing is that, you know, people are thinking about this processing and streaming together, and that's moving upstream and organizations.

And back from an adjustment perspective in the first half of the yard and the second half of the year. So that's one day the appointment and I I think <unk> exited in queue for next year, we'd have to deal with and I just reiterated a couple of them. The first one is that consumption transformation will be behind us.

Unknown Attendee: And so, you know, we think about any competition in this space, most of it tends to come from different destination systems, but increasingly the processing is kind of happening at the source and going out to all the destinations. So structurally, those are the three factors that we think give Confluent a unique advantage in this our expertise in Flink and just the fact that we have the core people, you know, driving that forward, you know, the ability to combine it with Kafka, the kind of de facto standard for the stream and really provide synergy between those things, and then structurally the fact that, you know, the processing of data is moving upstream, you know, to the source where the stream is created, which allows us to bring together that combination at the right time.

And what that means is how our customers want to consume confluence product and services will be very aligned with how we are going to going to market. So that's number one.

Number two with respect to the product unlocks of course, we'll have flink will be ritually B N. G. A couple with other unlocked somebody S. P site, that's gonna be Fedramp exiting Q4, 24, and that's gonna be delving from AI. So overall, we feel that a decent amount of tailwind exiting 2024.

Unknown Attendee: So thank you so much. Thanks, Peter. We'll take on next question from Brett Sills with Bank of America, followed by William Black. Wonderful. Thanks, Shane. Hi, everybody. I just wanted to ask a question here on this transition here, maybe one for you, Ron, you know, should we think about this, this headwind, if you will, subsiding in the one year anniversary from the from the change or is there some other way to think about the timing of when that headwind kind of bottoms out, if you will.

Which gives us confidence that we'll get back to a 30 per cent interest you know timing, we just Wanna get don't Wanna get into twenty-five guidance on specific timing, but that's that's a trajectory that <unk>.

Thanks, Thanks, so much for that real Hot and then that leads into my next question here you mentioned a few potential tailwinds exiting next year, maybe maybe to you J yeah.

Flank opportunity fed rap a I you know what are you. Most excited about when you look at the pipeline and some of these initiatives potential to accelerate growth.

Unknown Attendee: Yeah, Brett, that's a great question and as I shared in the prepared remarks, there are a couple of headwinds heading into 2024 and which we spoke about the couple of customers, macro and the consumption transformation. And as you think about the shape for next year, we feel that the consumption transformation will have a bigger impact from an adjustment perspective in the first half of the year than the second half of the year.

Yeah, I mean, I I think probably what's most exciting big picture is actually just if anything there's been an acceleration in interested in streaming you know I would think about this in stages, where this is you know this is a market that went from kind of very early naissance kind of evangelical to something that y'all, just increasingly very senior people and organizations.

<unk> believe in and see happening and are trying to adjust to and figuring out what does this mean for us and you know how do we take advantage of it I mean, I I think that's probably the biggest thing overall in terms of our products.

Unknown Attendee: So that's one data point and I think you're a G and I touched on it, exiting Q4 of next year. We'll have a few deal with and I'll just reiterate a couple of them. The first one is the consumption transformation will be behind us and what that means is how are customers want to consume confluence product and services will be very aligned with how we are going to go into market. So that's number one.

Yeah, I love them all that's that's why we're putting all the energy into it you know that's why I, even in a year of a lot of efficiency. You know, we really made sure that we have sufficient investment to bring together the rest of the state of streaming platform and we were just weren't willing to cut that stuff I think probably the biggest thing for us in terms of.

Unknown Attendee: Number two, with respect to the product unlocks, of course, we'll have flink, which will be which will be in GA couple with other unlocks on the DSP side. There's going to be Fed ramp exiting Q4 24 and there's going to be tailwinds from AI. So overall, we feel that there are decent amounts of tailwinds exiting 2024, which gives us confidence that we'll get back to our 30%. It's just, you know, timing we just want to get don't want to get into 25 guidance and specific timing, but that's that's a trajectory that we are thinking through.

<unk> what we do is is this link offering me. That's what brings these application workloads directly into our platform that was what makes it so much easier to build some of these things that actually capitalize on streaming to kind of run the logic of a business.

And sometimes that's the most exciting but they actually all played together you know without the connectors that get the data you don't have the streams to process without the innovation in core you don't have the ability to really handle the streaming data across big organization without the government and stuff. It's actually just hard to use this and you'll have correct guarantees around data and <unk>.

Unknown Attendee: Thanks so much for that Rohan. And then maybe that leads into my next question here. You mentioned a few potential tailwinds exiting next year. Maybe maybe to you Jay, you know, the flank opportunity fed ramp AI, you know, what are you most excited about when you look at the pipeline and some of these initiatives potential to accelerate growth. Yeah, I mean, I think probably what's most exciting big picture is actually just, you know, if anything there's been an acceleration and interest in streaming, you know, I would think about this in stages where this is a, you know, this is a market that went from kind of very early nascent, kind of evangelical to something that, yeah, just increasingly very senior people in organizations believe in and see happening and are trying to adjust to and figuring out, you know, what does this mean for us and, you know, how do we take advantage of it?

Reason about it so so they all kind of play together to form the platform. Sir So I think they're at all they're all kind of a powerful part of that story and I think that story is why people are so excited about this space.

Great to hear thanks, so much J.

Alright, I'll take our next question from Jason <unk>, William Blair, followed by <unk> excuse me.

Yeah <unk> <unk>.

Oh, excuse me J and I know you said you haven't seen this in the past, but why wouldn't repatriation b a trend in the digital native space cause you can save 30% of the cost and then what percentage of your revenue actually comes from digital natives today.

Yeah, Yeah, so sorry, I should clarify the comment I made it <unk> what I was saying is if you look at the amount of <unk> operating margin.

Unknown Attendee: I mean, I think that's probably the biggest thing overall. In terms of our products, I love them all. That's why we're putting all the energy into it. You know, that's why even in a year of a lot of efficiency, you know, we really made sure that we had sufficient investment to bring together the rest of this data streaming platform, and we weren't willing to cut that stuff. I think probably the biggest thing for us in terms of transformation of what we do is, is the link offering me that's what brings these application workloads directly into our platform.

Savings that companies are targeting it's often a very large percent.

I'm, not saying that moving into your Davis.

Three per cent I'm, just saying you know if.

You're trying to save 3%, 3% operating margin improvement you move some things around in a little small S. 30% you Gotta do something big right for confluence we've made really substantial improvements that came out of a combination of gross structural improvements optimizations cloud a whole bunch of things, but it was a bunch.

Unknown Attendee: That's what makes it so much easier to build some of these things that actually capitalize on streaming to kind of run the logic of a business, you know, in some sense, that's the most exciting, but they actually all played together. You know, without the connectors that get the data, you don't have the streams to process without the innovation in Cora, you don't have the ability to really handle the streaming data across, you know, big organization without the governance stuff.

Moving parts to make it happen if you look at other digital native companies are also doing big things I think for you know 99.5 per cent of companies <unk>, It's gonna be a lot more expensive, but you know that's up to them to model and figure it out, but I'm not saying that you'll she's 30 per cent savings when that does does that makes.

Sense.

Unknown Attendee: It's actually just hard to use this and, you know, have correct guarantees around data and reason about it. So, so they all kind of play together to form the platform. So, so I think they're at all, they're all kind of a powerful part of that story. And I think that story is why people are so excited about the space. Great to hear. Thanks so much, Jay. All right, I'll take on next question from Jason Ada, William Blair, followed by TDI, Jason.

Well I mean, there's I guess, there's just more examples crowd strike with back on prime right and they say that like two or three points of gross margin.

So it seems I guess material that the some of the digital natives are getting.

Significant savings, maybe about 30%, but <unk>, yeah, I mean look yeah, we can speculate either way I.

I guess I feel like we hear about this every couple of you'll be like we heard about dropbox doing it you every year you hear about some example, and <unk> companies selling private cloud stuff you know put it on the front page of everything to make a big deal about how oh the clouds over that's not really what we see like Bradley when we talked to archive.

Unknown Attendee: Yeah, thanks, Shane. I don't do me. Jay, I know you said you haven't seen this in the past, but why wouldn't repatriation be a trend in the digital native space, if you can say 30% on costs. And then what percentage of your revenue actually comes from digital natives today. [inaudible] You're going to do something big, right? For Confluent, we've made really substantial improvements. That's came out of a combination of growth, structural improvements, optimization of cloud, a whole bunch of things, but it was a bunch of moving parts to make it happen.

Summer base, including the digital natives I don't see a big movement. There you know I I do think you see a lot more optimization of cloud you know the usage of public cloud, that's certainly happening, but I don't see a big move out as being realistic I just don't think it makes sense, but yeah, we'll we'll see for US we obviously cell across both you know.

Founded on premise so to some extent, where like a little bit agnostic I personally as a technologist don't just don't see it as a you know a likely trend I I did this analysis internally when I worked at Lincoln.

And I think it made any sense [laughter], we were using the public cloud cloud has gotten cheaper you know since that time, so I I don't I don't.

Unknown Attendee: If you look at other digital native companies, they're also doing big things. I think for, you know, 99.5% of companies moving, you know, it's going to be a lot more expensive. But, you know, that's up to them to model that and figure that I'm not saying videos. So, she's 30% savings from that. Does that make sense? [inaudible] Well, I mean, there's, I guess there's just more examples. I know CrowdStrike moved back on Prime, right?

Don't think it's likely but obviously either way we were happy to work with the customers and then and then what percentage of your revenue maybe for real high of a percentage of revenue comes from a digital Nato's and and what percentage of your revenue comes from Israel.

Yeah, Israel happens to be a top 10 country, Jason and <unk>. So that's baked into the upload that'd be shared both working for and 2024. The digital database I think it's it's an opportunity for us I feel that where we have more opportunities.

Unknown Attendee: And they say that they're two or three points of gross margin. So it seems, I guess material that some of the digital natives are getting. Yeah, yeah, maybe not 30% but significantly. Yeah, I mean, look, you know, we can speculate either way, you know, I guess I feel like we hear about this every couple of you. We're like, we heard about the Dropbox doing it. You know, every year you hear about some example and, you know, or the company selling private cloud stuff, you know, put it on the front page of everything to make a big deal about how the clouds over.

Sheridan the digital native so that's obviously something that's ahead of US forces behind us. So although we are seeing a couple of between native customers that have been impacted by slower than expected use cases, but the bigger opportunity. If ahead of us from a digital native perspective.

If that sounds weird the yeah. The thing about comfort us as we kind of came back to tech like open source Kafka started in tech, but in terms of our sales, we actually started with more kind of traditional enterprises and as our cloud got to large scale came back to attack. So it's on one hand, it's a sector that's a little turbulence.

Unknown Attendee: That's not really what we see like, you know, broadly when we talk to our customer base, including the digital natives, I don't see a big movement there. You know, I do think you see a lot more optimization of cloud, you know, the usage of public cloud. That's certainly happening. But I don't see a big move out as being realistic. I just don't think it makes sense. But, you know, we'll see for us.

Right now on the other hand, what kind of underpenetrated relative to the cockpit usage and so there's kind of two contravening forces that does make it a little bit of a less predictable area, but like a real Hunt said, we actually think there's a lot of opportunity there.

Unknown Attendee: We obviously sell across both, you know, cloud and on premise. So to some extent, we're like a little bit agnostic. I personally as a technologist, don't just don't see it as a, you know, a likely trend. I did this analysis internally when I worked at LinkedIn. I didn't think it made sense. We were using the public cloud public cloud, it's gotten cheaper, you know, since that time. So I don't, you know, I don't think it's likely.

If you guys. Thanks, Jason will take our last two questions from Ted Cowan environment with Parker.

Okay, Great Alright, great. Thanks, J when you go through such bad go to market sales Com changes this is likely to be disruptive from from.

Unknown Attendee: But, but obviously either way, you know, we were happy to work with the customers. And then what percentage of your revenue, maybe for Rohan, what percentage of revenue comes from digital natives, and then what percentage of your revenue comes from Israel? Yeah, Israel happens to be a top 10 country, Jason, and so that's baked into the outlook that we share both for Q4 and 24. The digital native piece, I think it's an opportunity for us.

From a sales attrition standpoint are you able to talk about what.

How much proactive change you need to make to the make up of the sale structure.

And what that May mean for Chern and and then.

And kind of consumption go to market model do you feel like you need less sales coverage that in in the old go to market mall.

Yeah. That's a great question. So yeah, I, you know I I I.

I don't think it's gonna be that just rubbed it cause we did start the process. This year. So we're we're measuring consumption. There's a portion of compensation that's already dedicated to Ah. We've kind of taught her team a little bit of this so it's not like we haven't dipped our toes in the <unk> in the water and that I think takes a lot of the risk out of it we kind of know.

Unknown Attendee: I feel that we're, we have more opportunity to take share in the digital native. So that's obviously something that's ahead of us versus behind us. So although we are seeing a couple of digital native customers that have been impacted by slower than expected use cases, but the bigger opportunity is ahead of us from a digital native perspective. And if that sounds weird, the, you know, the thing about conflict is we kind of came back to tech, like open source, Kafka started in tech.

So that people can be successful with us that's kind of what gives us I guess the confidence to jump in with both feet I think realistically. If we were trying to do this from a cold start last year I think it would've been you know quite disruptive and highly risky I feel pretty good about what we're doing now it's still a big change you know it.

Unknown Attendee: But in terms of our sales, we actually started with more kind of traditional enterprises, and as our cloud got to large scale came back to tech. So it's on one hand, you know, it's a sector that's a little turbulent right now. On the other hand, we're kind of under penetrated relative to the Kafka usage. And so there's kind of two, you know, countervening forces that just make it a little bit of a less predictable area, but, but like I wrote on said, we actually think there's a lot of opportunity there.

Does mean that the primary metrics or all shifting and they're kind of all shifting together I think.

We I think about it from the team's point of view I think it was actually exciting I think people feel this friction today and how they are working with customers. You know I think doing the thing the customer wants is actually great. When you're in a go to market organization and if you look at the kind of grossing cloud revenue, we've done really well right there <unk>.

Unknown Attendee: Thanks, Jason. We'll take a last two questions from Derek the Cowan environment with Barclays Derek to go first. Great. All right. Great. Thanks. Jay, when you go through such big go to market and sales comp changes, this is likely to be disruptive from a kind of from a sales attrition standpoint. Are you able to talk about, you know, what, how much proactive change you need to make to the makeup of the sale structure.

Usher has been on our P. O. You know it has been on bookings. It has been on these kind of big upfront commitment. So you know part of this is about making you know constantly grow faster part of it is also making sure. Our field team is really successful and those two things kind of go together. So yeah, I I actually think it's pretty exciting and it's you know for for a.

Unknown Attendee: And what that may mean for turn and then in kind of consumption go to market model, do you feel like you need less sales coverage than in the old go to market model. Yeah, that's a great question. So yeah, you know, I don't think it's going to be that disruptive because we did start the process this year. So we're, you know, we're measuring consumption. There's a portion of compensation that's already dedicated to it.

A lot of people in go to market organizations. These consumption motions is kind of an opportunity. It's the new thing that's happening across a lot of these companies. If you you kind of know that and have done. It you kind of get a better position than what you're set up to do.

Sure I'll just add to what you said diet. If you look at just the health of our installed base today.

The redemption reached the gross retention rates have been consistently about 90 per cent I think that's one area, which we feel very good about and just looking ahead Oh of course with these transformation and the one off case of that being said, we expect to enter our property to tape a little bed, you'll still be about 100.

Unknown Attendee: We've kind of taught our team a little bit of this. So it's not like we haven't dipped our toes in the mouth in the water. And that I think takes a lot of the risk out of it. We kind of know that people can be successful with this. That's kind of what gives us. I guess the confidence to jump in with both feet. I think realistically if we were trying to do this from a cold start last year, I think it would have been, you know, quite disruptive and highly risky.

2020, <unk> as we go through next year, but exiting next year as we exit the transition we expect back to the 125 plus per cent range that reset for all medium term going from our perspective. So I hope that the installed base is also very solid that's something that I wanted to share.

Unknown Attendee: I feel pretty good about what we're doing. Now it's still big change. You know, it does mean that those primary metrics are all shifting and they're kind of all shifting together. I think when I think about it from the team's point of view, I think it's actually exciting. You know, I think people feel this friction today and how they're working with customer customers. You know, I think doing the thing that customer wants is actually great when you're in a go to market organization.

That's helpful and <unk>.

Just to.

Just a quick bought a couple of modeling questions. The how much of cloud revenue as consumption based today and how long will it get to be majority and I guess on the flip side with the go to market change away from on <unk>.

Unknown Attendee: And, you know, if you look at the kind of growth in cloud revenue, we've done really well, right, that pressure has been on RPO, you know, it has been on bookings. It has been on these kind of big upfront commitments. So, you know, part of this is about, you know, making, you know, conflict growth faster. Part of is also making sure our field team is, you know, really successful. And those two things kind of go together.

In a in a color to get a sense for what the bleed off of platform revenue is gonna look like next year.

Yeah for for cloud revenue 100 per cent of our cloud revenue is consumption.

And that's that's the motion that we've been driving and two chairs your points. That's why we're excited.

Unknown Attendee: So yeah, I actually think it's pretty exciting. And it's, you know, for a lot of people in go to market organizations, these consumption motions is kind of an opportunity. It's the new thing that's happening across a lot of these companies. If you kind of know that and have done it, you're kind of in a better position in what you're set up to do. And, Jay, I'll just add to what he said, Derek, if you look at just the health of our install base today, the retention rates, the gross retention rates have been consistently above 90%.

With respect to the reduction and friction with how our customers are buying and how we are selling so that's on the cloud site on your <unk>.

Pricing is a usage based model you know the go to market is still strongly oriented around commitments.

<unk> says other companies would call it.

Got it that's correct Yep and.

Canceled platform.

Of course, I know I'm, not going to double click and provide guidance for 2024, but just broad brush. If you look at our platform business over the last 12 months, we've been very happy with the performance, especially we've seen straying too and you know that the <unk> industries like financial services as well as.

Unknown Attendee: I think that's one area, which we feel pretty good, very good about. And just looking ahead, you know, of course, with these transformation and the one off cases that we said, we expect the NRR probably to develop a little bit. It will still be about 120% as we go through next year, but exiting next year, as we exit the transition, we expect back to the 125 plus percent range that we set for our medium term code from an NRR perspective.

The federal space so.

Information as we exit next year as we enter next to your other alright.

Alright, Thanks, Derek right now you've got the last question how far yeah. No. Thanks for squeezing me you guys and I'll make it a short one and so at the conference you could see the excitement around like you know when I was kind of the the.

Unknown Attendee: So the health of the install base is also very solid that something that I wanted to share. That's helpful. And, Rowan, just to just a quick couple of modeling questions, the how much of cloud revenue is consumption base today and how long will it get to be majority. And I guess on the flip side, you know, with the go to market, change away from on prem any color to get a sense for what the bleed off of platform revenue is going to look like next year.

The rooms are full I didn't get a feast etcetera.

How do you think about the adoption for as as you go kind of a next year do you think that's going to be like a couple kind of reference customers and everyone is going to look and see how that is working or did you think it is going to be more broad based it just to get an idea about the excitement for next year for the link kind of hold on yeah.

Unknown Attendee: Yeah, for cloud revenue, 100% of our cloud revenue is consumption. And that's that's a motion that we've been driving and two jays earlier points. That's why we're excited with respect to the reduction in friction with how our customers are buying and how we are selling. So that's on the cloud side. On your side, the pricing is a usage based model, you know, the go to market is still strongly oriented around commitments, you know, credit says other companies, as we thought.

It will definitely be more broad based in a couple of customers. Yeah. I mean, the you know this is out there and preview mode. Today, we've had great early adoption of people trying it you know it takes a little bit more before people were really put the kind of mission critical production workloads on it that has that kind of ramp up to G. At that but yeah, we expect to see red adoption over the course.

So the next year, we're very excited that.

Perfect. Thank you Alright that concludes today's earnings call. Thanks, again for joining us have a good one everyone take care of <unk>.

Thanks, everyone.

[noise].

Unknown Attendee: Yeah, that's correct. Yeah. And on Confluent platform, of course, right now I'm not going to double click and provide guidance for 2024, but just broad brush if you look at our platform business over the last 12 months. We've been very happy with the performance, especially we've seen strength in, you know, the industries like financial services as well as the federal space. So, you know, we're in a good position as we exit next year, as we enter next year, rather.

Unknown Attendee: All right. Thanks, Derek. Raimo, you got the last question. Go for it. Yeah. No, thanks for screening me guys. And I'll make it a short one. And so at the conference, you could see the excitement around slink, you know, and I was kind of the rules right for, I didn't get a seat, et cetera, this is. And how do you think about the adoption curve as you go kind of GA next year?

Unknown Attendee: Do you think that's going to be like the couple of kind of reference customers and everyone is going to look and see how that's working? Or do you think that's going to be more broad based? Is this to get an idea about the excitement for next year for the slink kind of. Yeah, I think it will definitely be more broad as in a couple of customers. Yeah, I mean, the, you know, this is out there in preview mode today.

Unknown Attendee: We've had great early adoption of people trying it. You know, it takes a little bit more before people really put the kind of mission critical production workloads on it. That's that kind of ramp up to GA. But, but yeah, we expect to see great. Adoption over the course of the next year. We're very excited about. Perfect. Thank you. All right. That concludes today's earnings call. Things again for joining us. Have a good one. Have a one. Take care. We'll talk soon. Thanks everyone. We'll see you in the next one.