Chief Customer and Partner Officer at ServiceNow Alyssa Henry CEO at Square c Google Cloud % paloalto Rey Perez Chief Customer Officer Chad Verbowski Chief Technology Officer Steffan Tomlinson Chief Financial Officer Microsoft ◎ New Relic. ORACLE Gunjan Aggarwal Chief People Officer ERICSSON Christina Liu Chief Accounting Officer Melanie Vinson Chief Legal Officer Zendesk Cloud-Native Complete Everywhere (ऋ | --- | --- | --- | --- | |-----------------------|------------|-------|-------| | Confluent \nMicros ...

PART I [ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) Presents the unaudited condensed consolidated financial statements for Q1 2023, detailing revenue, net loss, balance sheet, and cash flows, with explanatory notes [Condensed Consolidated Financial Statements](index=5&type=section&id=Condensed%20Consolidated%20Financial%20Statements) This section presents the condensed consolidated statements of operations, balance sheets, and cash flows for Q1 2023, highlighting key financial performance and position metrics Condensed Consolidated Statements of Operations (Q1 2023 vs Q1 2022) | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | **Total Revenue** | **$174,302** | **$126,139** | | Subscription Revenue | $160,567 | $113,920 | | Gross Profit | $116,158 | $80,362 | | Operating Loss | ($166,093) | ($111,482) | | **Net Loss** | **($152,555)** | **($112,987)** | | Net Loss Per Share | ($0.52) | ($0.41) | Condensed Consolidated Balance Sheet Highlights | Metric | As of March 31, 2023 (in thousands) | As of December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $343,460 | $435,781 | | Marketable securities | $1,506,392 | $1,491,044 | | **Total Assets** | **$2,292,825** | **$2,344,849** | | Total Liabilities | $1,547,974 | $1,575,372 | | Total Stockholders' Equity | $744,851 | $769,477 | Condensed Consolidated Statements of Cash Flows | Metric | Three Months Ended March 31, 2023 (in thousands) | Three Months Ended March 31, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($77,772) | ($55,031) | | Net cash used in investing activities | ($52,483) | ($311,734) | | Net cash provided by financing activities | $37,729 | $38,468 | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) Detailed notes explain accounting policies, significant events like the Immerok acquisition and restructuring, revenue disaggregation, and remaining performance obligations - In January 2023, the Company acquired Immerok GmbH for **$54.9 million** in cash, resulting in **$43.5 million** of goodwill[77](index=77&type=chunk)[123](index=123&type=chunk) Revenue Disaggregation (Q1 2023 vs Q1 2022) | Category | Q1 2023 % of Total Revenue | Q1 2022 % of Total Revenue | | :--- | :--- | :--- | | **By Geography** | | | | United States | 60% | 63% | | International | 40% | 37% | | **By Product/Service** | | | | Confluent Cloud | 42% | 31% | | Confluent Platform - PCS | 39% | 44% | | Confluent Platform - License | 11% | 15% | | Services | 8% | 10% | - In January 2023, the company approved a restructuring plan, including an **8% workforce reduction**, resulting in **$33.4 million** of charges in Q1 2023, consisting of **$17.7 million** in employee costs and **$15.7 million** in lease abandonment charges[170](index=170&type=chunk) - Remaining Performance Obligations (RPO) totaled **$742.6 million** as of March 31, 2023, with approximately **64%** expected to be recognized as revenue over the next 12 months[114](index=114&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)](index=30&type=section&id=ITEM%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's financial condition and results of operations for Q1 2023, analyzing key performance drivers, strategic initiatives, and financial trends [Overview and Key Business Metrics](index=30&type=section&id=Overview%20and%20Key%20Business%20Metrics) This section outlines Confluent's strategic focus on cloud adoption and customer expansion, detailing key business metrics and management's approach to macroeconomic challenges - The company is navigating adverse macroeconomic conditions by streamlining operating expenses, including a workforce reduction in January 2023, while prudently investing in growth[157](index=157&type=chunk) Key Business Metrics | Metric | As of March 31, 2023 | As of March 31, 2022 | YoY Growth | | :--- | :--- | :--- | :--- | | Total Customers | ~4,690 | ~4,120 | 14% | | Customers with >$100k ARR | 1,075 | 803 | 34% | | Remaining Performance Obligations (RPO) | $742.6 million | $551.1 million | 35% | | Dollar-Based Net Retention Rate (NRR) | >130% | N/A | N/A | - Confluent Cloud revenue grew to **42%** of total revenue for Q1 2023, up from **31%** in Q1 2022, indicating a successful shift towards its cloud-native SaaS offering[611](index=611&type=chunk) [Results of Operations](index=35&type=section&id=Results%20of%20Operations) This section details the company's Q1 2023 financial results, including revenue growth, gross profit, operating expenses, and the resulting operating loss Revenue Comparison (Q1 2023 vs Q1 2022) | Revenue Type | Q1 2023 (in thousands) | Q1 2022 (in thousands) | YoY Change | YoY % Change | | :--- | :--- | :--- | :--- | :--- | | Subscription | $160,567 | $113,920 | $46,647 | 41% | | Services | $13,735 | $12,219 | $1,516 | 12% | | **Total Revenue** | **$174,302** | **$126,139** | **$48,163** | **38%** | Gross Margin Comparison | Margin Type | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Subscription Gross Margin | 73% | 71% | | Services Gross Margin | (11)% | 0% | | **Total Gross Margin** | **67%** | **64%** | - Operating expenses increased primarily due to a **$33.4 million** restructuring charge, a **$27.2 million (47%)** increase in R&D expenses, and a **$21.9 million (21%)** increase in Sales & Marketing expenses[244](index=244&type=chunk)[211](index=211&type=chunk)[608](index=608&type=chunk) [Liquidity and Capital Resources](index=41&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity position, including cash, cash equivalents, and marketable securities, and analyzes cash flows from operating, investing, and financing activities - The company's principal sources of liquidity as of March 31, 2023, were cash, cash equivalents, and marketable securities totaling **$1,849.9 million**[216](index=216&type=chunk) - Net cash used in operating activities was **$77.8 million** for Q1 2023, primarily consisting of a net loss of **$152.6 million**, adjusted for non-cash charges including **$79.3 million** of stock-based compensation and **$15.7 million** of lease abandonment charges[217](index=217&type=chunk) - Cash used in investing activities was **$52.5 million**, mainly due to **$45.8 million** paid for the Immerok business combination and net purchases of marketable securities[638](index=638&type=chunk) [ITEM 3. Quantitative and Qualitative Disclosures about Market Risk](index=45&type=section&id=ITEM%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section details the company's primary market risk exposures, including interest rate risk on its financial instruments and foreign currency risk on operating expenses, and outlines mitigation strategies - The company is exposed to interest rate risk on its **$1.85 billion** portfolio of cash, cash equivalents, and marketable securities, and on the fair value of its **$1.1 billion** convertible senior notes[253](index=253&type=chunk)[674](index=674&type=chunk) - Foreign currency risk exists as a portion of operating expenses are denominated in foreign currencies, and a hedging program was established in December 2022 to reduce this impact[643](index=643&type=chunk)[254](index=254&type=chunk) [ITEM 4. Controls and Procedures](index=46&type=section&id=ITEM%204.%20Controls%20and%20Procedures) Management's evaluation concludes that disclosure controls and procedures were effective as of March 31, 2023, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, concluded that as of March 31, 2023, the company's disclosure controls and procedures were effective at the reasonable assurance level[225](index=225&type=chunk) - There were no material changes to the company's internal control over financial reporting during the quarter[256](index=256&type=chunk) PART II. OTHER INFORMATION [ITEM 1. Legal Proceedings](index=47&type=section&id=ITEM%201.%20Legal%20Proceedings) The company reports no current legal proceedings expected to have a material adverse effect on its business, financial condition, or cash flows - As of the filing date, Confluent is not a party to any legal proceedings that would be expected to have a material adverse effect on the company[647](index=647&type=chunk) [ITEM 1A. Risk Factors](index=48&type=section&id=ITEM%201A.%20Risk%20Factors) This section outlines significant risks to the company's business, including operating losses, macroeconomic uncertainty, intense competition, cybersecurity threats, customer retention, and its dual-class stock structure - The company has a history of operating losses, with a net loss of **$152.6 million** in Q1 2023, and may not achieve or sustain profitability in the future[267](index=267&type=chunk)[708](index=708&type=chunk) - The business faces intense competition from internal IT teams using open-source software (Apache Kafka), and from major public cloud providers like AWS, Azure, and GCP, which offer competing managed services[693](index=693&type=chunk) - Cybersecurity incidents pose a significant risk, highlighted by the 2021 Codecov breach where attackers gained unauthorized access and copied private source code repositories[565](index=565&type=chunk) - The dual-class stock structure concentrates approximately **85.3%** of voting power with pre-IPO stockholders (as of March 31, 2023), limiting the influence of Class A common stockholders on corporate matters[480](index=480&type=chunk)[460](index=460&type=chunk) - The business depends on retaining existing customers and expanding their usage, with a key risk that customers may not renew subscriptions or may choose open-source alternatives or competing products[261](index=261&type=chunk)[420](index=420&type=chunk) [ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=97&type=section&id=ITEM%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company reports no recent unregistered equity sales and no material change in the planned use of proceeds from its June 2021 IPO - There have been no material changes in the planned use of proceeds from the company's June 2021 IPO[542](index=542&type=chunk) [ITEM 5. Other Information](index=98&type=section&id=ITEM%205.%20Other%20Information) On April 28, 2023, the Board of Directors amended the company's bylaws to align with the SEC's universal proxy rule and update stockholder nomination and proposal requirements - On April 28, 2023, the Board of Directors amended the company's bylaws to align with the SEC's universal proxy rule (Rule 14a-19) and update requirements for stockholder nominations and proposals[545](index=545&type=chunk)[560](index=560&type=chunk) [ITEM 6. Exhibits](index=99&type=section&id=ITEM%206.%20Exhibits) This section lists exhibits filed with the 10-Q report, including Amended and Restated Bylaws, CEO/CFO certifications, and XBRL documents - The list of exhibits includes the Amended and Restated Bylaws, CEO/CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906, and XBRL data files[527](index=527&type=chunk)[562](index=562&type=chunk)

Part I [Business](index=6&type=section&id=Item%201.%20Business) Confluent provides a data infrastructure platform, built on Apache Kafka, enabling real-time data motion for enterprises through self-managed and cloud-native SaaS offerings, driving growth via a land-and-expand model and international expansion - Confluent aims to establish data in motion as a new data infrastructure category, serving as a real-time central nervous system for enterprises [21](index=21&type=chunk) - The company offers **Confluent Platform** (self-managed software) and **Confluent Cloud** (fully-managed SaaS) on major cloud providers [36](index=36&type=chunk)[47](index=47&type=chunk) - The business model leverages a 'Data in Motion Journey' for customer expansion, resulting in a dollar-based net retention rate of **just under 130%** as of December 31, 2022 [32](index=32&type=chunk)[45](index=45&type=chunk) - International revenue constituted **38% of total revenue** for the year ended December 31, 2022, serving customers in over 100 countries [46](index=46&type=chunk) - As of December 31, 2022, Confluent employed **2,761 people** across 22 countries, with **62%** in the United States [77](index=77&type=chunk) [Risk Factors](index=21&type=section&id=Item%201A.%20Risk%20Factors) The company faces significant risks including persistent operating losses, macroeconomic uncertainty, intense competition, cybersecurity threats, and concentrated voting power from its dual-class stock structure - The company reported a net loss of **$452.6 million** in 2022 and an accumulated deficit of **$1.2 billion** as of December 31, 2022, with no assurance of future profitability [99](index=99&type=chunk) - Macroeconomic uncertainties, such as inflation and potential recession, have extended sales cycles and increased IT spending scrutiny, potentially impacting future results [102](index=102&type=chunk) - The business heavily relies on its data-in-motion offering, with Confluent Platform contributing **61% of subscription revenue** in 2022, a decrease from 73% in 2021 [106](index=106&type=chunk)[107](index=107&type=chunk) - Key competition arises from internal IT teams utilizing open-source software and major public cloud providers like AWS, Microsoft Azure, and Google Cloud [112](index=112&type=chunk)[113](index=113&type=chunk) - A 2021 security breach at third-party vendor Codecov led to unauthorized access and copying of Confluent's private source code, exposing cybersecurity and supply-chain vulnerabilities [160](index=160&type=chunk) - The dual-class stock structure concentrates approximately **87.1% of voting power** with Class B common stockholders as of December 31, 2022 [258](index=258&type=chunk) [Unresolved Staff Comments](index=69&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) The company has no unresolved staff comments from the Securities and Exchange Commission - None [290](index=290&type=chunk) [Properties](index=69&type=section&id=Item%202.%20Properties) Confluent leases its corporate headquarters in Mountain View, California, and other global offices, holding no owned real property - The company's headquarters in Mountain View, California, consist of approximately **75,475 square feet** of leased space, with the lease expiring in 2029 [291](index=291&type=chunk) [Legal Proceedings](index=69&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings that would materially adversely affect its business or financial condition - Confluent is not currently a party to any material legal proceedings [292](index=292&type=chunk) [Mine Safety Disclosures](index=69&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This section is not applicable to the company's operations - None [293](index=293&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=70&type=section&id=Item%205.%20Market%20for%20Registrant%27s%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Confluent's Class A common stock trades on Nasdaq under 'CFLT' since its 2021 IPO, with the company retaining earnings for growth and no plans for future cash dividends - Class A Common Stock has been listed on the Nasdaq Global Select Market under the symbol **'CFLT'** since June 24, 2021 [296](index=296&type=chunk) - The company has never declared or paid cash dividends, intending to retain all funds for future business growth [298](index=298&type=chunk) - The Initial Public Offering (IPO) on June 28, 2021, generated aggregate gross proceeds of **$828.0 million** [300](index=300&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=72&type=section&id=Item%207.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses 51% revenue growth in 2022, driven by customer acquisition and Confluent Cloud adoption, alongside continued net losses from growth investments and macroeconomic impacts [Key Business Metrics](index=76&type=section&id=Key%20Business%20Metrics) Key business metrics demonstrate strong growth, with Remaining Performance Obligations reaching $740.7 million and a dollar-based net retention rate just under 130% Key Business Metrics as of December 31 | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Remaining Performance Obligations (RPO) (in millions) | $740.7 | $500.6 | $261.7 | | Customers with ≥ $100k in ARR | 991 | 734 | 513 | | Dollar-Based Net Retention Rate (NRR) | Just under 130% | N/A | N/A | [Results of Operations](index=79&type=section&id=Results%20of%20Operations) In fiscal year 2022, total revenue increased 51% to $585.9 million, driven by subscription growth, though net loss widened to $452.6 million due to increased operating expenses Consolidated Statements of Operations Highlights (in thousands) | Line Item | FY 2022 | FY 2021 | YoY Change | YoY % Change | | :--- | :--- | :--- | :--- | :--- | | **Total Revenue** | **$585,944** | **$387,864** | **$198,080** | **51%** | | Subscription Revenue | $535,009 | $347,099 | $187,910 | 54% | | Services Revenue | $50,935 | $40,765 | $10,170 | 25% | | **Gross Profit** | **$383,529** | **$250,572** | **$132,957** | **53%** | | Gross Margin | 65% | 65% | - | - | | **Operating Loss** | **($462,674)** | **($339,620)** | **($123,054)** | **36%** | | **Net Loss** | **($452,551)** | **($342,801)** | **($109,750)** | **32%** | Operating Expenses (in thousands) | Expense Category | FY 2022 | FY 2021 | YoY Change | YoY % Change | | :--- | :--- | :--- | :--- | :--- | | Research and development | $264,041 | $161,925 | $102,116 | 63% | | Sales and marketing | $456,452 | $319,331 | $137,121 | 43% | | General and administrative | $125,710 | $108,936 | $16,774 | 15% | | **Total operating expenses** | **$846,203** | **$590,192** | **$255,011** | **43%** | [Liquidity and Capital Resources](index=84&type=section&id=Liquidity%20and%20Capital%20Resources) Confluent maintains strong liquidity with $1.93 billion in cash and marketable securities, primarily funded by equity and debt, despite increased net cash used in operating activities - Principal liquidity sources as of December 31, 2022, totaled **$1.927 billion** in cash, cash equivalents, and marketable securities [364](index=364&type=chunk) - In December 2021, the company issued **$1.1 billion** in 0% convertible senior notes due 2027, yielding net proceeds of **$1.08 billion** [363](index=363&type=chunk) Summary of Cash Flows (in thousands) | Cash Flow Category | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Net cash used in operating activities | ($157,333) | ($105,060) | ($82,057) | | Net cash used in investing activities | ($865,805) | ($400,583) | ($176,859) | | Net cash provided by financing activities | $82,241 | $1,844,514 | $276,758 | [Quantitative and Qualitative Disclosures About Market Risk](index=87&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) Confluent faces market risks from interest rate fluctuations on its $1.93 billion portfolio and convertible notes, and foreign currency exposure on operating expenses, mitigated by a hedging program - The company faces interest rate risk on its **$1.93 billion** portfolio of cash, cash equivalents, and marketable securities, and its **$1.1 billion** convertible senior notes [384](index=384&type=chunk)[385](index=385&type=chunk) - Foreign currency risk primarily stems from non-U.S. operating expenses, with a hedging program initiated in December 2022 to mitigate this exposure [386](index=386&type=chunk)[387](index=387&type=chunk) [Financial Statements and Supplementary Data](index=88&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for fiscal years 2020-2022, along with the independent auditor's report and detailed notes on accounting policies and financial instruments [Report of Independent Registered Public Accounting Firm](index=89&type=section&id=Report%20of%20Independent%20Registered%20Public%20Accounting%20Firm) PricewaterhouseCoopers LLP issued unqualified opinions on Confluent's financial statements and internal controls, highlighting Standalone Selling Price determination as a critical audit matter - PricewaterhouseCoopers LLP issued an **unqualified opinion** on both the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022 [394](index=394&type=chunk) - A Critical Audit Matter was identified regarding management's judgment in determining the Standalone Selling Price (SSP) for performance obligations [402](index=402&type=chunk)[403](index=403&type=chunk) [Consolidated Financial Statements](index=92&type=section&id=Consolidated%20Financial%20Statements) Consolidated financial statements show total assets of $2.34 billion, increased liabilities, and a net loss of $452.6 million in 2022, contributing to an accumulated deficit of $1.2 billion Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $435,781 | $1,375,932 | | Marketable securities | $1,491,044 | $640,085 | | **Total Assets** | **$2,344,849** | **$2,342,729** | | Deferred revenue (current & non-current) | $322,829 | $246,477 | | Convertible senior notes, net | $1,084,500 | $1,080,701 | | **Total Liabilities** | **$1,575,372** | **$1,492,448** | | **Total Stockholders' Equity** | **$769,477** | **$850,281** | Consolidated Statement of Operations (in thousands) | Account | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Total revenue | $585,944 | $387,864 | $236,577 | | Gross profit | $383,529 | $250,572 | $161,101 | | Operating loss | ($462,674) | ($339,620) | ($233,175) | | Net loss | ($452,551) | ($342,801) | ($229,828) | | Net loss per share | ($1.62) | ($1.82) | ($2.21) | [Notes to Consolidated Financial Statements](index=99&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) The notes detail revenue disaggregation, convertible senior notes, stock-based compensation, and subsequent events including the Immerok GmbH acquisition and a January 2023 workforce reduction Disaggregation of Revenue by Type (in thousands) | Revenue Type | FY 2022 | FY 2021 | FY 2020 | | :--- | :--- | :--- | :--- | | Confluent Platform - License | $76,019 | $69,183 | $49,043 | | Confluent Platform - PCS | $247,803 | $183,737 | $128,178 | | Confluent Cloud | $211,187 | $94,179 | $31,412 | | **Total Subscription Revenue** | **$535,009** | **$347,099** | **$208,633** | | Services Revenue | $50,935 | $40,765 | $27,944 | | **Total Revenue** | **$585,944** | **$387,864** | **$236,577** | Disaggregation of Revenue by Geography | Geography | FY 2022 % | FY 2021 % | FY 2020 % | | :--- | :--- | :--- | :--- | | United States | 62% | 64% | 66% | | International | 38% | 36% | 34% | - In January 2023, the company acquired Immerok GmbH for approximately **$54.9 million** in cash [574](index=574&type=chunk) - In January 2023, the company approved a restructuring plan, including an **8% reduction** of its global workforce, with estimated non-recurring charges of **$27 million to $31 million** [576](index=576&type=chunk) [Controls and Procedures](index=129&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and the independent auditor concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022 [578](index=578&type=chunk) - Management's report on internal control over financial reporting concluded effectiveness as of December 31, 2022, a conclusion audited and concurred with by the independent auditor [579](index=579&type=chunk) Part III [Directors, Executive Officers, Compensation, and Governance](index=131&type=section&id=Items%2010-14) Information for Items 10-14, covering directors, executive officers, compensation, and governance, is incorporated by reference from the forthcoming 2023 Proxy Statement - Information on Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees and Services is incorporated by reference from the forthcoming 2023 Proxy Statement [587](index=587&type=chunk)[589](index=589&type=chunk)[590](index=590&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=132&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all exhibits filed with the Annual Report on Form 10-K, including consolidated financial statements and an index of incorporated documents - This section contains the consolidated financial statements and a list of all exhibits filed with the 10-K report [593](index=593&type=chunk) [Form 10-K Summary](index=134&type=section&id=Item%2016.%20Form%2010-K%20Summary) The company indicates that no Form 10-K summary is provided - None [598](index=598&type=chunk)

Financial Data and Key Metrics Changes - Total revenue grew 41% to $169 million, with Confluent Cloud revenue increasing 102% to $68 million [85][99] - Non-GAAP operating margin improved by 20 percentage points, indicating a significant enhancement in profitability [85][96] - Net loss per share was negative $0.09, with free cash flow margin improving four percentage points to negative 18.3% [102][104] Business Line Data and Key Metrics Changes - Subscription revenue grew 44% to $155.3 million, accounting for 92% of total revenue [99] - Confluent Cloud represented over 70% of new ACV bookings in Q4, marking the fifth consecutive quarter where Cloud exceeded 50% of new ACV bookings [99][100] - The number of customers with $100,000 or more in ARR increased by 35%, totaling 991 customers [98] Market Data and Key Metrics Changes - Revenue from the U.S. grew 35% to $100.5 million, while revenue from outside the U.S. grew 50% to $68.2 million [101] - RPO for the fourth quarter grew 48% to $740.7 million, with current RPO estimated at approximately $456.2 million, up 43% [119] - The dollar-based net retention rate remained healthy, just under 130%, with hybrid NRR continuing to be the highest [120] Company Strategy and Development Direction - The company aims to dominate the $60 billion market, with a focus on maintaining R&D investment while streamlining costs [87][118] - A restructuring of the workforce was undertaken, optimizing for strategic priorities and high ROI business areas, including an 8% reduction in workforce [110][111] - The acquisition of Immerok aims to enhance stream processing capabilities, with plans to launch a Flink offering in Confluent Cloud later this year [114][115] Management's Comments on Operating Environment and Future Outlook - The macroeconomic environment has led to elongated deal cycles and increased budget scrutiny, impacting large deals and new business [76][109] - The company is confident in its ability to achieve approximately 30% revenue growth while accelerating its path to profitability by one year [104][125] - Management emphasized the importance of stream processing and its role in driving customer value and operational efficiency [80][81] Other Important Information - The company plans to hold Investor Day 2023 in New York City on June 13 [84] - The restructuring is aimed at preserving the ability to drive top-line growth while optimizing operational efficiencies [66][110] Q&A Session Summary Question: How is the sales execution affected by recent changes in leadership and workforce? - Management indicated that the primary issue is the macro environment rather than internal execution problems, with opportunities for improvement identified [136] Question: What patterns were observed in deal cycles across different segments? - The enterprise segment experienced the most pronounced impact from budget scrutiny, while the commercial segment remained stable [142] Question: What gives confidence in the revenue guidance despite macro challenges? - The current RPO provides about 60% visibility into total revenue for FY '23, which is higher than the previous year, along with a greater proportion of fully ramped sales reps [145]

Financial Data and Key Metrics Changes - Total revenue grew 48% year-over-year to $152 million [7] - Non-GAAP operating margin improved by 14 percentage points year-over-year [7][35] - RPO grew 72% to $663.5 million, with current RPO estimated at approximately $408.2 million, up 59% [41] - Subscription revenue grew 50% to $138.7 million, accounting for 91% of total revenue [41] Business Line Data and Key Metrics Changes - Confluent Cloud revenue increased 112% year-over-year to $57 million, representing 38% of total revenue compared to 26% a year ago [7][42] - Confluent platform revenue was $81.8 million, up 25% and accounted for 54% of total revenue [41] Market Data and Key Metrics Changes - Revenue from the US grew 44% to $95.1 million, while revenue from outside the US grew 56% to $56.6 million [45] - The company added 120 net new customers, ending the quarter with approximately 4,240 total customers, up 40% [46] Company Strategy and Development Direction - The company aims to drive durable and efficient growth, with a market opportunity of approximately $60 billion [28] - The focus is on converting open-source users and landing new customers through self-service on Confluent Cloud [28] - The introduction of Stream Designer and Stream Governance Advanced aims to enhance customer engagement and expand the addressable market [27][38] Management's Comments on Operating Environment and Future Outlook - Management noted that the demand for data streaming remains strong despite macroeconomic pressures [58] - The company raised its revenue and bottom line guidance for Q4 and FY 2022, reflecting confidence in its business model [53][55] - For FY 2023, the company expects revenue in the range of $760 million to $770 million, incorporating a negative impact from increased scrutiny on deal approvals [56] Other Important Information - The company ended Q3 with $1.94 billion in cash, cash equivalents, and marketable securities [52] - The company announced the appointment of Rey Perez as Chief Customer Officer [36] Q&A Session Summary Question: How is the shift from open-source DIY to Confluent Cloud being perceived by large Apache Kafka users? - Management noted that the total cost of ownership (TCO) of the cloud offering has become a significant part of the sales process, with many large tech customers recognizing the benefits of moving to Confluent Cloud [61][62] Question: Can you discuss the seasonality of Confluent Cloud revenue? - Management indicated that Q4 typically sees less aggressive deployment of new workloads as companies prepare for year-end, but they expect a sequential increase in revenue [65] Question: How has the consumption impact related to macroeconomic conditions affected the company? - Management stated that the mission-critical nature of their use cases has helped maintain strong net retention rates, despite economic pressures [69] Question: What percentage of the business is supporting operational use cases versus analytical use cases? - Management indicated that the vast majority of use cases are operational in nature, which contributes to the resilience of demand [73][76] Question: How does the shift to cloud impact the competitive landscape? - Management noted that the shift is making on-premise solutions less relevant, while emphasizing the importance of cloud partnerships [92][96]

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-40526 CONFLUENT, INC. (Exact Name of Registrant as Specified in its Charter) | --- | --- | |--------------------------------- ...

Confluent, Inc. (NASDAQ:CFLT) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET Company Participants Shane Xie - IR Edward Kreps - Co-Founder, Chairman & CEO Steffan Tomlinson - CFO Conference Call Participants Jason Ader - William Blair & Company Karl Keirstead - UBS Sanjit Singh - Morgan Stanley Bradley Sills - Bank of America Merrill Lynch Rudy Kessinger - D.A. Davidson & Co. Michael Turrin - Wells Fargo Securities Raimo Lenschow - Barclays Bank Pinjalim Bora - JPMorgan Chase & Co. James Wood - ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 001-40526 CONFLUENT, INC. (Exact Name of Registrant as Specified in its Charter) | --- | --- | |-------------------------------------- ...

Confluent, Inc. (NASDAQ:CFLT) Q1 2022 Results Earnings Conference Call May 5, 2022 4:30 PM ET Company Participants Shane Xie - Director, Investor Relations Jay Kreps - Co-founder and Chief Executive Officer Steffan Tomlinson - Chief Financial Officer Conference Call Participants Sanjit Singh - Morgan Stanley Jason Ader - William Blair Derrick Wood - Cowen and Company Michael Turrin - Wells Fargo Phil Winslow - Credit Suisse Rob Owens - Piper Sandler Adam Bergere - Bank of America Eric Heath - KeyBanc Capita ...

[PART I. FINANCIAL INFORMATION](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)](index=5&type=section&id=ITEM%201.%20FINANCIAL%20STATEMENTS%20(UNAUDITED)) This section presents unaudited condensed consolidated financial statements and notes for periods ended March 31, 2022, and December 31, 2021 [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets and liabilities slightly decreased from December 31, 2021, to March 31, 2022, with cash reducing and marketable securities increasing | Metric | March 31, 2022 (in thousands) | December 31, 2021 (in thousands) | | :-------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $1,047,589 | $1,375,932 | | Marketable securities | $943,048 | $640,085 | | Total current assets | $2,195,249 | $2,226,073 | | Total assets | $2,317,501 | $2,342,729 | | Total current liabilities | $330,729 | $348,188 | | Total liabilities | $1,481,432 | $1,492,448 | | Total stockholders' equity | $836,069 | $850,281 | | Accumulated deficit | $(861,841) | $(748,854) | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The company reported significant revenue growth for Q1 2022, primarily in subscriptions, but increased operating expenses led to a larger net loss | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Total revenue | $126,139 | $77,028 | | Subscription revenue | $113,920 | $67,992 | | Services revenue | $12,219 | $9,036 | | Total cost of revenue | $45,777 | $23,838 | | Gross profit | $80,362 | $53,190 | | Total operating expenses | $191,844 | $98,334 | | Operating loss | $(111,482) | $(45,144) | | Net loss | $(112,987) | $(44,526) | | Net loss per share (basic & diluted) | $(0.41) | $(0.41) | - Total revenue increased by **64% year-over-year**, from **$77.0 million** in Q1 2021 to **$126.1 million** in Q1 2022. Subscription revenue grew by **67.6% YoY**, while services revenue grew by **35.2% YoY**[17](index=17&type=chunk) - Operating expenses increased by **95.1% year-over-year**, from **$98.3 million** in Q1 2021 to **$191.8 million** in Q1 2022, leading to a **146.9% increase in operating loss**[17](index=17&type=chunk) [Condensed Consolidated Statements of Comprehensive Loss](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Loss) Total comprehensive loss significantly increased in Q1 2022 due to a larger net loss and increased unrealized loss on marketable securities | Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Net loss | $(112,987) | $(44,526) | | Unrealized loss on marketable securities | $(4,712) | $(185) | | Total comprehensive loss | $(117,699) | $(44,711) | - Unrealized loss on marketable securities increased significantly from **$(185) thousand** in Q1 2021 to **$(4,712) thousand** in Q1 2022[19](index=19&type=chunk) [Condensed Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders' Equity (Deficit)](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Redeemable%20Convertible%20Preferred%20Stock%20and%20Stockholders'%20Equity%20(Deficit)) Stockholders' equity decreased in Q1 2022 due to net loss, partially offset by increased additional paid-in capital from stock-based compensation | Metric (in thousands) | January 1, 2022 | March 31, 2022 | | :-------------------------------- | :-------------- | :------------- | | Additional Paid-In Capital | $1,599,962 | $1,703,449 | | Accumulated Other Comprehensive Loss | $(830) | $(5,542) | | Accumulated Deficit | $(748,854) | $(861,841) | | Total Stockholders' Equity | $850,281 | $836,069 | - Stock-based compensation contributed **$58.9 million** to additional paid-in capital during the three months ended March 31, 2022[21](index=21&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash used in operating and investing activities significantly increased in Q1 2022, while cash from financing activities also rose | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(55,031) | $(19,989) | | Net cash (used in) provided by investing activities | $(311,734) | $13,845 | | Net cash provided by financing activities | $38,468 | $13,460 | | Net (decrease) increase in cash, cash equivalents, and restricted cash | $(328,343) | $7,308 | | Cash, cash equivalents, and restricted cash at end of period | $1,048,339 | $45,114 | - Cash used in operating activities increased by **175% YoY**, primarily due to a larger net loss and changes in operating assets and liabilities[23](index=23&type=chunk)[169](index=169&type=chunk) - Investing activities shifted from providing **$13.8 million** in cash in Q1 2021 to using **$311.7 million** in Q1 2022, largely due to increased purchases of marketable securities[23](index=23&type=chunk)[171](index=171&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes explain accounting policies, financial instrument valuations, debt, revenue, equity, and tax positions for the financial statements [1. Organization and Description of Business](index=12&type=section&id=1.%20Organization%20and%20Description%20of%20Business) Confluent, Inc. provides a data infrastructure platform for 'data in motion,' offering self-managed software and a fully-managed cloud-native SaaS - Confluent's core business is a data infrastructure platform for 'data in motion,' deployable as self-managed software (Confluent Platform) or a fully-managed SaaS (Confluent Cloud)[28](index=28&type=chunk) [2. Basis of Presentation and Summary of Significant Accounting Policies](index=12&type=section&id=2.%20Basis%20of%20Presentation%20and%20Summary%20of%20Significant%20Accounting%20Policies) Financial statements are prepared under GAAP, with key policies including marketable securities valuation and credit loss allowance, with early adoption of new credit loss guidance - The company classifies marketable securities as available-for-sale, recorded at fair value, with unrealized gains/losses in OCI[36](index=36&type=chunk)[37](index=37&type=chunk) - Accounts receivable includes unbilled receivables (**$38.1 million** as of March 31, 2022) and is reduced by an allowance for expected credit losses, which was not material[39](index=39&type=chunk)[43](index=43&type=chunk) - The company early adopted ASU No. 2016-13 (Credit Losses) effective January 1, 2022, with no cumulative effect adjustment to accumulated deficit[44](index=44&type=chunk) [3. Marketable Securities](index=14&type=section&id=3.%20Marketable%20Securities) Marketable securities increased to **$943.0 million** by March 31, 2022, primarily U.S. treasury securities, with a total unrealized loss of **$5.5 million** | Marketable Securities (in thousands) | March 31, 2022 Fair Value | December 31, 2021 Fair Value | | :----------------------------------- | :------------------------ | :--------------------------- | | U.S. treasury securities | $696,509 | $446,435 | | Corporate notes and bonds | $139,030 | $125,604 | | U.S. agency obligations | $77,245 | $54,007 | | Commercial paper | $30,264 | $10,995 | | Municipal bonds | - | $3,044 | | Total marketable securities | $943,048 | $640,085 | - As of March 31, 2022, marketable securities had an amortized cost of **$948.5 million** and total unrealized losses of **$5.5 million**[45](index=45&type=chunk) | Contractual Maturities (in thousands) | March 31, 2022 Amortized Cost | March 31, 2022 Fair Value | | :------------------------------------ | :---------------------------- | :------------------------ | | Due within one year | $777,327 | $774,766 | | Due after one year through five years | $171,192 | $168,282 | | Total | $948,519 | $943,048 | [4. Fair Value of Financial Instruments](index=15&type=section&id=4.%20Fair%20Value%20of%20Financial%20Instruments) Financial assets, including cash equivalents and marketable securities, are measured at fair value, primarily Level 2, with convertible senior notes valued at **$916.4 million** | Financial Instrument (in thousands) | March 31, 2022 Total Fair Value | December 31, 2021 Total Fair Value | | :---------------------------------- | :------------------------------ | :------------------------------- | | Cash equivalents | $191,481 | $98,855 | | Marketable securities | $943,048 | $640,085 | | Total | $1,134,429 | $738,940 | - Most marketable securities and U.S. treasury cash equivalents are classified as Level 2, valued using observable market inputs[49](index=49&type=chunk) - The fair value of the **0% convertible senior notes due 2027** was **$916.4 million** as of March 31, 2022, down from **$1,206.7 million** at December 31, 2021, classified within Level 2[50](index=50&type=chunk) [5. Balance Sheet Components](index=16&type=section&id=5.%20Balance%20Sheet%20Components) Property and equipment, net, increased to **$18.5 million**, while accrued expenses and other liabilities decreased to **$71.9 million** | Property and Equipment (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Internal-use software | $10,595 | $8,024 | | Construction in progress | $6,605 | $5,140 | | Property and equipment, net | $18,486 | $14,428 | | Accrued Expenses and Other Liabilities (in thousands) | March 31, 2022 | December 31, 2021 | | :---------------------------------------------------- | :------------- | :---------------- | | Accrued compensation and benefits | $15,685 | $27,703 | | Employee contributions under employee stock purchase plan | $9,146 | $19,247 | | Total accrued expenses and other liabilities | $71,924 | $98,974 | [6. Convertible Senior Notes](index=16&type=section&id=6.%20Convertible%20Senior%20Notes) In December 2021, the company issued **$1.1 billion** in **0% convertible senior notes due 2027** and entered into capped call transactions to reduce dilution - Issued **$1.1 billion** aggregate principal amount of **0% convertible senior notes due 2027** in December 2021, with net proceeds of **$1,080.5 million**[54](index=54&type=chunk) - Initial conversion rate is **9.9936 shares per $1,000 principal amount** (approx. **$100.06 per share**), subject to adjustment[55](index=55&type=chunk) - Conversion conditions were not met as of March 31, 2022, classifying the notes as long-term debt[59](index=59&type=chunk) - Incurred **$19.5 million** in debt issuance costs, amortized to interest expense over the term at an effective rate of **0.35%**. Amortization was **$0.9 million** for Q1 2022[61](index=61&type=chunk) - Entered into capped call transactions for **$91.0 million** to reduce potential dilution, recorded as a reduction to additional paid-in capital[64](index=64&type=chunk) [7. Commitments and Contingencies](index=18&type=section&id=7.%20Commitments%20and%20Contingencies) The company has non-cancelable operating leases and indemnification provisions, with no material legal matters or significant changes to purchase obligations - Non-cancelable operating leases primarily for office space, expiring through 2029[65](index=65&type=chunk) - No material legal matters or significant changes to purchase obligations as of March 31, 2022[67](index=67&type=chunk)[68](index=68&type=chunk) - Enters into indemnification provisions with customers and third parties, with maximum potential future payments not determinable but no material costs incurred to date[70](index=70&type=chunk)[71](index=71&type=chunk) [8. Revenue](index=19&type=section&id=8.%20Revenue) Subscription revenue, including Confluent Cloud, accounts for **90% of total revenue**, with Remaining Performance Obligations significantly increasing | Revenue Category (in thousands) | Three Months Ended March 31, 2022 | % of Total Revenue (2022) | Three Months Ended March 31, 2021 | % of Total Revenue (2021) | | :------------------------------ | :-------------------------------- | :------------------------ | :-------------------------------- | :------------------------ | | United States | $78,992 | 63% | $49,279 | 64% | | International | $47,147 | 37% | $27,749 | 36% | | Confluent Platform - License | $18,947 | 15% | $13,961 | 18% | | Confluent Platform - PCS | $56,060 | 44% | $40,112 | 52% | | Confluent Cloud | $38,913 | 31% | $13,919 | 18% | | Subscription Total | $113,920 | 90% | $67,992 | 88% | | Services | $12,219 | 10% | $9,036 | 12% | | Total revenue | $126,139 | 100% | $77,028 | 100% | - Confluent Cloud revenue grew by **180% year-over-year**, increasing its share of total revenue from **18% to 31%**[72](index=72&type=chunk) | Metric (in thousands) | March 31, 2022 | December 31, 2021 | | :------------------------------------ | :------------- | :---------------- | | Remaining Performance Obligations (RPO) | $551,100 | $280,900 | | Deferred Revenue | $265,700 | $246,500 | - Approximately **60% of RPO** is expected to be recognized as revenue over the next 12 months[73](index=73&type=chunk) | Deferred Contract Acquisition Costs (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------------------------- | :-------------------------------- | :-------------------------------- | | Beginning balance | $78,824 | $47,599 | | Capitalization of contract acquisition costs | $12,080 | $10,866 | | Amortization of deferred contract acquisition costs | $(8,470) | $(5,535) | | Ending balance | $82,434 | $52,930 | [9. Stockholders' Equity](index=20&type=section&id=9.%20Stockholders'%20Equity) The company maintains Class A and Class B common stock, with significant stock-based compensation expense recognized under equity incentive plans - Class A common stock has one vote per share, and Class B common stock has ten votes per share. Class B shares are convertible to Class A under certain conditions[78](index=78&type=chunk)[79](index=79&type=chunk) | Shares Reserved for Future Issuance | March 31, 2022 | December 31, 2021 | | :---------------------------------- | :------------- | :---------------- | | 2014 Stock Plan (Options & RSUs) | 58,866,631 | 65,399,423 | | 2021 Equity Incentive Plan (Options & RSUs) | 9,361,114 | 2,961,468 | | 2021 Employee Stock Purchase Plan | 7,145,776 | 5,162,575 | | Total | 116,393,943 | 106,320,711 | | Stock-Based Compensation Expense (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :---------------------------------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenue - subscription | $5,313 | $975 | | Cost of revenue - services | $1,862 | $544 | | Research and development | $20,085 | $3,511 | | Sales and marketing | $21,062 | $4,976 | | General and administrative | $9,047 | $3,347 | | Total stock-based compensation | $58,896 | $13,451 | - Unrecognized stock-based compensation expense was **$735.6 million** as of March 31, 2022, to be recognized over a weighted-average period of **3.3 years**[92](index=92&type=chunk) [10. Income Taxes](index=23&type=section&id=10.%20Income%20Taxes) The company recorded a **$0.7 million** income tax provision for Q1 2022, primarily due to a valuation allowance on deferred tax assets | Income Tax Metric (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | | Provision for (benefit from) income taxes | $689 | $(110) | - The company maintains a full valuation allowance against its U.S. and U.K. deferred tax assets[94](index=94&type=chunk)[162](index=162&type=chunk) - Gross unrecognized tax benefits were **$13.8 million** as of March 31, 2022, not expected to significantly change within 12 months[95](index=95&type=chunk) [11. Net Loss Per Share](index=24&type=section&id=11.%20Net%20Loss%20Per%20Share) Basic and diluted net loss per share remained at **$(0.41)** for Q1 2022 and 2021, despite increased weighted-average shares outstanding | Net Loss Per Share Metric | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :------------------------ | :-------------------------------- | :-------------------------------- | | Net loss | $(112,987) | $(44,526) | | Weighted-average shares | 272,890,829 | 108,731,605 | | Net loss per share | $(0.41) | $(0.41) | | Potentially Dilutive Shares (Anti-dilutive) | March 31, 2022 | March 31, 2021 | | :------------------------------------------ | :------------- | :------------- | | Stock options | 55,684,668 | 79,624,342 | | RSUs | 12,543,077 | 14,000 | | Shares issuable upon conversion of 2027 Notes | 10,992,960 | - | | Total | 81,564,691 | 197,891,609 | [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=ITEM%202.%20MANAGEMENT'S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) Management discusses financial performance, condition, and outlook, highlighting revenue growth, increased expenses, and strategic investments [Overview](index=25&type=section&id=Overview) Confluent's cloud-native platform, built on Apache Kafka, drives **64% YoY revenue growth** and **62% customer growth** by setting data in motion - Confluent's mission is to 'set data in motion' using a cloud-native platform built on Apache Kafka[102](index=102&type=chunk)[103](index=103&type=chunk) - Revenue is primarily generated from subscriptions to Confluent Platform (self-managed) and Confluent Cloud (fully-managed SaaS)[104](index=104&type=chunk) | Metric | March 31, 2022 | March 31, 2021 | YoY Growth | | :-------------- | :------------- | :------------- | :--------- | | Total Customers | 4,120 | 2,540 | 62% | | Total Revenue | $126.1M | $77.0M | 64% | [Impact of COVID-19](index=26&type=section&id=Impact%20of%20COVID-19) COVID-19 caused service delays and longer sales cycles but accelerated digital transformation, leading to increased travel and event expenses in Q1 2022 - COVID-19 caused delays in professional/education services and lengthened sales cycles, but also accelerated digital transformation efforts for customers[109](index=109&type=chunk) - Company measures included remote work, suspended non-essential travel, virtual events, and temporary reduction in employee hiring, which negatively impacted near- to medium-term growth[110](index=110&type=chunk) - Expenses related to travel, in-person events, real estate, and facilities increased in Q1 2022, with expected continued growth[110](index=110&type=chunk) [Key Factors Affecting Our Performance](index=27&type=section&id=Key%20Factors%20Affecting%20Our%20Performance) Performance is driven by market-leading offerings, **180% YoY Confluent Cloud adoption**, global customer expansion, and strong customer retention (NRR over 130%) - Focus on product leadership and increasing brand strength, with rapid growth in Confluent Cloud since its 2017 launch[113](index=113&type=chunk) - Confluent Cloud revenue increased by **180% year-over-year**, from **$13.9 million** in Q1 2021 to **$38.9 million** in Q1 2022[114](index=114&type=chunk) - Customer count grew by **62% year-over-year**, reaching approximately **4,120 customers** as of March 31, 2022, driven by Confluent Cloud adoption[115](index=115&type=chunk) - Dollar-based Net Retention Rate (NRR) was **over 130%** as of March 31, 2022, indicating strong expansion within existing customers[125](index=125&type=chunk) - The company prioritizes substantial investments in long-term revenue and profitability potential over near-term optimization[118](index=118&type=chunk) [Key Business Metrics](index=28&type=section&id=Key%20Business%20Metrics) The company monitors RPO, customers with **$100K+ ARR**, and NRR to assess performance, with RPO significantly increasing and large ARR customers growing by **41% YoY** | Metric | March 31, 2022 | March 31, 2021 | YoY Change | | :-------------------------------------- | :------------- | :------------- | :--------- | | Remaining Performance Obligations (RPO) | $551.1M | $280.9M | 96.2% | | Customers with $100K+ ARR | 791 | 561 | 41.0% | | Dollar-Based Net Retention Rate (NRR) | >130% | N/A | N/A | - RPO is not necessarily indicative of future revenue growth due to varying consumption timing and expansion[121](index=121&type=chunk) - ARR calculation was refined in Q3 2021 to include only overages above contractually committed ARR, with immaterial impact to historical amounts[124](index=124&type=chunk) [Components of Results of Operations](index=29&type=section&id=Components%20of%20Results%20of%20Operations) Revenue is primarily from subscriptions, with costs driven by personnel and cloud infrastructure; operating expenses are expected to increase with growth investments - Subscription revenue from Confluent Platform (term-based licenses, PCS) is recognized partly upfront and mostly ratably. Confluent Cloud revenue is usage-based[127](index=127&type=chunk) - Cost of subscription revenue includes personnel, third-party cloud infrastructure, and internal-use software amortization. Cost of services revenue includes personnel and third-party contractors[131](index=131&type=chunk)[132](index=132&type=chunk) - Gross margin is expected to fluctuate due to sales price, revenue mix (Confluent Platform vs. Cloud), and cloud infrastructure usage/optimization[134](index=134&type=chunk) - Operating expenses (R&D, S&M, G&A) are primarily driven by personnel-related costs and are expected to increase as the business grows and invests in its offering, sales force, and public company operations[135](index=135&type=chunk)[136](index=136&type=chunk)[137](index=137&type=chunk)[138](index=138&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) Q1 2022 saw substantial revenue growth, especially in Confluent Cloud, but significantly increased costs and operating expenses led to a larger net loss and decreased gross margins [Comparison of the Three Months Ended March 31, 2022 and 2021](index=32&type=section&id=Comparison%20of%20the%20Three%20Months%20Ended%20March%2031,%202022%20and%202021) Total revenue increased by **64%** to **$126.1 million**, but rising costs and operating expenses led to a net loss of **$(113.0) million** and decreased gross margins | Revenue (in thousands) | 2022 | 2021 | Change | % Change | | :--------------------- | :---------- | :---------- | :---------- | :------- | | Subscription | $113,920 | $67,992 | $45,928 | 68% | | Services | $12,219 | $9,036 | $3,183 | 35% | | Total Revenue | $126,139 | $77,028 | $49,111 | 64% | - Confluent Cloud's share of subscription revenue increased from **20%** in Q1 2021 to **34%** in Q1 2022[148](index=148&type=chunk) | Cost of Revenue (in thousands) | 2022 | 2021 | Change | % Change | | :----------------------------- | :---------- | :---------- | :---------- | :------- | | Subscription | $33,603 | $15,757 | $17,846 | 113% | | Services | $12,174 | $8,081 | $4,093 | 51% | | Total Cost of Revenue | $45,777 | $23,838 | $21,939 | 92% | | Gross Margin | 2022 | 2021 | | :----------------------------- | :--- | :--- | | Subscription | 71% | 77% | | Services | 0% | 11% | | Total Gross Margin | 64% | 69% | | Operating Expenses (in thousands) | 2022 | 2021 | Change | % Change | | :-------------------------------- | :---------- | :---------- | :---------- | :------- | | Research and development | $57,661 | $24,313 | $33,348 | 137% | | Sales and marketing | $106,702 | $58,509 | $48,193 | 82% | | General and administrative | $27,481 | $15,512 | $11,969 | 77% | - Net loss increased from **$(44.5) million** in Q1 2021 to **$(113.0) million** in Q1 2022[143](index=143&type=chunk) [Liquidity and Capital Resources](index=35&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$1.99 billion** in cash and marketable securities, sufficient for current needs despite ongoing operating losses - Principal liquidity sources are cash, cash equivalents, and marketable securities, totaling **$1,990.6 million** as of March 31, 2022[164](index=164&type=chunk) - The company has an accumulated deficit of **$861.8 million** as of March 31, 2022, and expects continued operating losses and negative cash flows[165](index=165&type=chunk) | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(55,031) | $(19,989) | | Net cash (used in) provided by investing activities | $(311,734) | $13,845 | | Net cash provided by financing activities | $38,468 | $13,460 | - Cash used in operating activities increased due to net loss and changes in operating assets/liabilities, including a **$22.9 million** decrease in accrued expenses and a **$12.1 million** increase in deferred contract acquisition costs[169](index=169&type=chunk) - Investing activities used **$311.7 million**, primarily for purchases of marketable securities (**$403.9 million**), partially offset by maturities (**$95.5 million**)[171](index=171&type=chunk) - Financing activities provided **$38.5 million**, mainly from employee stock purchase plan proceeds (**$22.5 million**) and stock option exercises (**$16.8 million**)[174](index=174&type=chunk) [Critical Accounting Policies and Estimates](index=37&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Financial statements rely on significant management estimates for revenue recognition, deferred contract costs, and stock-based compensation, with no material changes reported - Significant estimates and judgments include revenue recognition, deferred contract costs, and valuation of stock-based awards[397](index=397&type=chunk) - No material changes to critical accounting policies and estimates since the Annual Report[177](index=177&type=chunk) [Recent Accounting Pronouncements](index=37&type=section&id=Recent%20Accounting%20Pronouncements) Information on recent accounting pronouncements, including early adoption of ASU No. 2016-13, is detailed in Note 2 of the financial statements - Refer to Note 2 for details on recent accounting pronouncements, including the early adoption of ASU No. 2016-13 (Credit Losses) effective January 1, 2022[44](index=44&type=chunk)[178](index=178&type=chunk) [Jumpstart Our Business Startups ("JOBS") Act Accounting Election](index=37&type=section&id=Jumpstart%20Our%20Business%20Startups%20(%22JOBS%22)%20Act%20Accounting%20Election) As an emerging growth company, Confluent uses the JOBS Act's extended transition period for new accounting standards, potentially affecting comparability - Confluent is an 'emerging growth company' and has elected the extended transition period for new/revised accounting standards under the JOBS Act[179](index=179&type=chunk)[425](index=425&type=chunk) - This election allows delay in adopting certain accounting standards until they apply to private companies, potentially impacting comparability of financial statements[179](index=179&type=chunk)[425](index=425&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK](index=38&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURE%20ABOUT%20MARKET%20RISK) This section outlines the company's exposure to interest rate risk on its investments and convertible notes, and foreign currency risk on international operating expenses [Interest Rate Risk](index=38&type=section&id=Interest%20Rate%20Risk) The company faces interest rate risk on its **$1.99 billion** in cash and marketable securities, and **$1.1 billion** convertible notes, though a 10% rate change is not material - As of March 31, 2022, the company held **$1,990.6 million** in cash, cash equivalents, and marketable securities[182](index=182&type=chunk) - A hypothetical **10% change in interest rates** would not have a material impact on the fair value of cash equivalents and marketable securities[182](index=182&type=chunk) - The fair value of the **$1.1 billion 0% convertible senior notes due 2027** is subject to market risk due to its conversion feature, but changes do not impact financial position, cash flows, or results of operations due to the fixed nature of the debt[183](index=183&type=chunk) [Foreign Currency Risk](index=38&type=section&id=Foreign%20Currency%20Risk) While revenue is U.S. dollar-denominated, international operating expenses expose the company to foreign currency fluctuations, though a 10% change is not material - All sales contracts are denominated in U.S. dollars, so revenue is not significantly exposed to foreign currency risk[184](index=184&type=chunk) - A portion of operating expenses is incurred outside the U.S. and denominated in foreign currencies, creating exposure to foreign exchange rate fluctuations[184](index=184&type=chunk) - A hypothetical **10% change in foreign exchange rates** would not have a material impact on financial condition, results of operations, or cash flows[184](index=184&type=chunk) - The company does not currently use hedging arrangements for foreign currency risk but may consider them in the future as international operations grow[184](index=184&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=39&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section details management's evaluation of disclosure controls and procedures, confirming their effectiveness and no material changes in internal control [Evaluation of Disclosure Controls and Procedures](index=39&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of March 31, 2022 - Disclosure controls and procedures were evaluated and deemed effective at the reasonable assurance level as of March 31, 2022[186](index=186&type=chunk) [Changes in Internal Control over Financial Reporting](index=39&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) No material changes in internal control over financial reporting were identified during the quarter ended March 31, 2022 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2022[187](index=187&type=chunk) [Inherent Limitations on Effectiveness of Controls](index=39&type=section&id=Inherent%20Limitations%20on%20Effectiveness%20of%20Controls) Management acknowledges that control systems provide reasonable, not absolute, assurance and may not prevent or detect all errors and fraud - Control systems provide reasonable, not absolute, assurance and may not prevent or detect all errors and fraud due to inherent limitations[188](index=188&type=chunk) [PART II. OTHER INFORMATION](index=40&type=section&id=PART%20II.%20OTHER%20INFORMATION) [ITEM 1. LEGAL PROCEEDINGS](index=40&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - No current legal proceedings are expected to have a material adverse effect on the company's business, financial condition, or results of operations[191](index=191&type=chunk) [ITEM 1A. RISK FACTORS](index=40&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section details significant risks that could adversely affect the company's business, financial condition, and stock price [Risk Factors Summary](index=40&type=section&id=Risk%20Factors%20Summary) Key risks include unsustainable rapid growth, operating losses, COVID-19 impact, dependence on its platform, Confluent Cloud adoption, and concentrated voting control - Rapid growth may not be indicative of future growth, making future prospects difficult to evaluate[193](index=193&type=chunk) - The company has a history of operating losses and may not achieve or sustain profitability[194](index=194&type=chunk) - Business is substantially dependent on its data-in-motion platform; failure to satisfy customer demands or achieve market acceptance would be harmful[195](index=195&type=chunk) - Significant investment in Confluent Cloud is ongoing, and failure to achieve further market adoption could harm growth[196](index=196&type=chunk) - The dual-class stock structure concentrates voting control with pre-IPO stockholders, limiting influence of other investors[203](index=203&type=chunk) [Risks Related to Our Business and Operations](index=41&type=section&id=Risks%20Related%20to%20Our%20Business%20and%20Operations) Risks include unsustainable rapid growth, ongoing operating losses, COVID-19 impacts, dependence on platform adoption, intense competition, and financial result fluctuations - Rapid growth may not be sustainable, and future revenue growth rates are expected to decline due to various factors including market maturation and competition[204](index=204&type=chunk)[205](index=205&type=chunk)[208](index=208&type=chunk) - The company has a history of net losses and an accumulated deficit of **$861.8 million**, with expectations of continued losses due to significant investments in growth[212](index=212&type=chunk) - The COVID-19 pandemic continues to pose risks, including potential delays in customer spending, pricing discounts, and operational disruptions from remote work, impacting financial forecasts[216](index=216&type=chunk)[217](index=217&type=chunk) - Success is highly dependent on the continued market acceptance of its data-in-motion platform and Confluent Cloud, facing competition from open-source alternatives and major public cloud providers[220](index=220&type=chunk)[221](index=221&type=chunk)[225](index=225&type=chunk)[226](index=226&type=chunk)[229](index=229&type=chunk)[231](index=231&type=chunk)[232](index=232&type=chunk) - Challenges in managing rapid growth, scaling operations, and optimizing cloud infrastructure costs could harm business and financial results[227](index=227&type=chunk) - Financial results are expected to fluctuate due to revenue mix changes, seasonality in sales, and the timing of customer consumption, making future projections difficult[240](index=240&type=chunk)[241](index=241&type=chunk)[246](index=246&type=chunk)[249](index=249&type=chunk) - The company may require additional capital to support business growth, which may not be available on acceptable terms, leading to potential dilution or increased debt[268](index=268&type=chunk) [Risks Related to Cybersecurity and Data Privacy](index=55&type=section&id=Risks%20Related%20to%20Cybersecurity%20and%20Data%20Privacy) The company faces significant cybersecurity risks, including potential breaches, errors in offerings, service interruptions, and complex, costly compliance with global privacy laws - Security breaches, cyber-attacks, and errors by personnel could compromise confidentiality, integrity, or availability of data, harming reputation and reducing demand[270](index=270&type=chunk)[271](index=271&type=chunk) - The Codecov Breach in January 2021 led to unauthorized access to credentials and copying of private Github repositories containing source code and customer-related references, though no customer data in products was accessed[274](index=274&type=chunk) - Real or perceived errors, failures, bugs, or defects in the offering could damage customer businesses, lead to claims, and harm reputation[280](index=280&type=chunk)[281](index=281&type=chunk) - Interruptions or performance problems with the offering, due to vulnerabilities, errors, or cloud service disruptions, could lead to customer loss and reputational damage[282](index=282&type=chunk)[283](index=283&type=chunk) - Compliance with evolving and stringent global privacy, data security, and data protection laws (e.g., CCPA, CPRA, GDPR, PIPL) is expensive and complex, with non-compliance risking significant fines and legal liabilities[285](index=285&type=chunk)[286](index=286&type=chunk)[287](index=287&type=chunk)[288](index=288&type=chunk)[290](index=290&type=chunk)[291](index=291&type=chunk)[295](index=295&type=chunk) [Risks Related to Our Sales and Marketing Efforts and Brand](index=60&type=section&id=Risks%20Related%20to%20Our%20Sales%20and%20Marketing%20Efforts%20and%20Brand) Growth depends on expanding sales and marketing, maintaining brand strength, and navigating pricing models, while enterprise sales cycles pose challenges - Failure to effectively expand and improve sales and marketing capabilities, including recruiting and productivity of sales personnel, could harm customer acquisition and market acceptance[296](index=296&type=chunk)[297](index=297&type=chunk) - Maintaining and enhancing the Confluent brand, particularly among developers and against competitors like large public cloud providers and open-source alternatives, is critical for customer expansion[299](index=299&type=chunk)[300](index=300&type=chunk) - Limited history with pricing models means adjustments may be needed, potentially impacting revenue, margins, and customer acquisitions[301](index=301&type=chunk) - Sales to enterprise customers involve longer sales cycles, complex requirements, substantial upfront costs, and less predictability, which can result in lower than expected revenue[303](index=303&type=chunk)[304](index=304&type=chunk)[305](index=305&type=chunk) - Estimates of market opportunity and growth forecasts may be inaccurate, and the business may not grow at similar rates even if the market expands[306](index=306&type=chunk)[307](index=307&type=chunk)[309](index=309&type=chunk) [Risks Related to Our Customers](index=63&type=section&id=Risks%20Related%20to%20Our%20Customers) Success depends on attracting and retaining customers, with challenges including competition, conversion of free users, maintaining NRR, providing support, and managing indemnity liabilities - Failure to attract new customers or expand the sales pipeline, especially converting free users or pay-as-you-go customers, would adversely affect business[311](index=311&type=chunk)[312](index=312&type=chunk) - Future success depends on existing customers renewing subscriptions, purchasing additional commitments, and expanding use, with the dollar-based net retention rate subject to decline or fluctuation[313](index=313&type=chunk)[314](index=314&type=chunk) - Failure to offer high-quality support, either directly or through partners, could harm reputation and sales[316](index=316&type=chunk) - Loss of key customers or failure to renew agreements could significantly impact revenue and ability to acquire new customers[317](index=317&type=chunk)[318](index=318&type=chunk) - Incorrect implementation or use of the offering, or customers' failure to update Confluent Platform, could lead to dissatisfaction and negative publicity[319](index=319&type=chunk)[320](index=320&type=chunk) - Indemnity provisions in agreements expose the company to substantial liability for intellectual property infringement, data protection, and other losses, potentially uncapped for certain claims[322](index=322&type=chunk)[323](index=323&type=chunk) - Failure to meet service-level commitments could result in customer terminations, reduced renewals, service credits, and reputational damage[324](index=324&type=chunk)[325](index=325&type=chunk) [Risks Related to Our Intellectual Property](index=65&type=section&id=Risks%20Related%20to%20Our%20Intellectual%20Property) Reliance on open-source software, particularly Apache Kafka, and challenges in protecting its own IP expose the company to litigation, competition, and costly disputes - Use of third-party open source software, including Apache Kafka, could lead to litigation, non-compliance with licenses, or requirements to release proprietary code[326](index=326&type=chunk)[327](index=327&type=chunk)[328](index=328&type=chunk) - The offering's evolution from Apache Kafka means the company does not own exclusive rights to it and cannot control its evolution, allowing competitors to develop similar or superior offerings[331](index=331&type=chunk)[332](index=332&type=chunk) - Failure to obtain, maintain, protect, or enforce intellectual property rights (trademarks, patents, trade secrets) could allow competitors access to proprietary technology and harm the brand[333](index=333&type=chunk)[334](index=334&type=chunk)[335](index=335&type=chunk)[337](index=337&type=chunk) - The Codecov Breach resulted in exfiltrated source code, potentially limiting the ability to enforce rights against unauthorized users and allowing insights into proprietary architecture[338](index=338&type=chunk) - Intellectual property disputes are costly, time-consuming, and could lead to significant liability, license agreements, or redesigns of offerings[341](index=341&type=chunk)[342](index=342&type=chunk)[343](index=343&type=chunk) [Risks Related to Our Dependence on Third Parties](index=70&type=section&id=Risks%20Related%20to%20Our%20Dependence%20on%20Third%20Parties) Heavy reliance on third-party cloud providers (AWS, Azure, GCP) and channel partners exposes the company to service disruptions, capacity limitations, and operational failures - Heavy reliance on AWS, Azure, and GCP for Confluent Cloud infrastructure exposes the company to risks from disruptions, capacity limitations, and failures to adapt to evolving network technology[345](index=345&type=chunk)[346](index=346&type=chunk) - Termination or amendment of service agreements with cloud providers, or internet service provider issues, could lead to significant delays and expenses[347](index=347&type=chunk) - Inability to develop and maintain successful relationships with channel partners, especially internationally, could harm business and sales opportunities[349](index=349&type=chunk)[350](index=350&type=chunk) - Dependence on third-party SaaS technologies for critical business functions means interruptions or performance problems could adversely affect operations and finances[351](index=351&type=chunk)[352](index=352&type=chunk) [Risks Related to Our Employees and Culture](index=71&type=section&id=Risks%20Related%20to%20Our%20Employees%20and%20Culture) Success depends on retaining skilled personnel in a competitive market, and maintaining company culture during rapid growth poses significant challenges - Success depends on retaining and motivating highly skilled personnel, including senior management and engineering professionals[353](index=353&type=chunk)[354](index=354&type=chunk)[355](index=355&type=chunk) - Intense competition for talent, inflationary pressures, and volatility in equity awards could adversely affect the ability to recruit and retain key employees[357](index=357&type=chunk) - Failure to maintain company values and culture during rapid headcount growth and as a public company could lead to increased employee turnover and harm the business[358](index=358&type=chunk)[359](index=359&type=chunk) [Risks Related to Our International Operations](index=72&type=section&id=Risks%20Related%20to%20Our%20International%20Operations) International expansion faces risks from political/economic instability, regulatory changes, data localization, differing labor laws, and foreign currency fluctuations - International expansion is a key growth strategy, with **37% of Q1 2022 revenue** from outside the U.S. and **34% of employees** located internationally[361](index=361&type=chunk) - International operations face risks such as political/economic instability, regulatory changes, data localization, differing labor laws, and management challenges across diverse cultures[363](index=363&type=chunk)[364](index=364&type=chunk)[365](index=365&type=chunk) - Exposure to fluctuations in foreign currency exchange rates on operating expenses could negatively affect results, despite U.S. dollar-denominated revenue[367](index=367&type=chunk) [Risks Related to Our Tax, Legal, and Regulatory Environment](index=74&type=section&id=Risks%20Related%20to%20Our%20Tax,%20Legal,%20and%20Regulatory%20Environment) The company is exposed to risks from export controls, economic sanctions, anti-corruption laws, changes in internet/tax laws, and limitations on NOL carryforwards - Subject to U.S. export controls and economic sanctions, including restrictions against Russia and Belarus, which could impair international market competition or lead to liability[368](index=368&type=chunk)[369](index=369&type=chunk)[371](index=371&type=chunk)[374](index=374&type=chunk) - Compliance with anti-corruption, anti-bribery, and anti-money laundering laws (FCPA, UK Bribery Act) is critical, with violations risking criminal/civil liability and reputational harm[375](index=375&type=chunk)[376](index=376&type=chunk)[379](index=379&type=chunk) - Changes in laws and regulations related to the internet could diminish demand for software, particularly Confluent Cloud[380](index=380&type=chunk)[381](index=381&type=chunk) - Changes in tax laws (e.g., Tax Act, international proposals) or sales tax obligations could materially affect financial position and results of operations[382](index=382&type=chunk)[383](index=383&type=chunk)[385](index=385&type=chunk)[386](index=386&type=chunk) - Ability to use net operating loss (NOL) carryforwards (**$1,096.7 million federal, $559.6 million state** as of Dec 31, 2021) may be limited by ownership changes or regulatory changes[387](index=387&type=chunk)[388](index=388&type=chunk) - Effective tax rate could increase due to shifts in income across jurisdictions, changes in tax laws, or audit outcomes[389](index=389&type=chunk)[390](index=390&type=chunk)[391](index=391&type=chunk) [Risks Related to Our Accounting Policies and Internal Controls](index=78&type=section&id=Risks%20Related%20to%20Our%20Accounting%20Policies%20and%20Internal%20Controls) Changes in GAAP, incorrect management estimates, or ineffective internal controls could adversely affect financial results, investor confidence, and stock value - Changes in GAAP or interpretations could significantly affect reported results of operations[394](index=394&type=chunk)[395](index=395&type=chunk) - Incorrect estimates or assumptions related to critical accounting policies (e.g., revenue recognition, deferred contract costs, stock-based compensation) could adversely affect results[396](index=396&type=chunk)[397](index=397&type=chunk) - Failure to develop and maintain effective internal control over financial reporting as a public company could harm investor confidence and stock value[398](index=398&type=chunk)[399](index=399&type=chunk)[401](index=401&type=chunk) [Risks Related to Ownership of Our Class A Common Stock](index=79&type=section&id=Risks%20Related%20to%20Ownership%20of%20Our%20Class%20A%20Common%20Stock) The dual-class stock structure concentrates voting control, potentially affecting stock price volatility, future sales, dividend policy, and investor attractiveness as an emerging growth company - The dual-class stock structure (Class B with **10 votes**, Class A with **1 vote**) concentrates voting control with pre-IPO stockholders, limiting influence of Class A holders and potentially affecting stock price[402](index=402&type=chunk)[403](index=403&type=chunk)[404](index=404&type=chunk)[405](index=405&type=chunk) - Exclusion from certain stock indices (e.g., Russell 2000, S&P 500) due to dual-class structure may limit investment by passive funds and adversely affect trading price/liquidity[407](index=407&type=chunk) - The Class A common stock price may be highly volatile due to financial fluctuations, competitive announcements, data breaches, future stock sales, and general market conditions[408](index=408&type=chunk)[409](index=409&type=chunk)[410](index=410&type=chunk) - Future sales of Class A common stock, including conversions of convertible notes and exercises of equity awards, could depress the market price[413](index=413&type=chunk)[414](index=414&type=chunk)[415](index=415&type=chunk)[417](index=417&type=chunk) - The company does not intend to pay dividends, so investment returns depend solely on stock price appreciation[421](index=421&type=chunk)[422](index=422&type=chunk) - As an 'emerging growth company,' reduced reporting requirements may make Class A common stock less attractive to some investors, and significant costs are incurred operating as a public company[424](index=424&type=chunk)[425](index=425&type=chunk)[429](index=429&type=chunk)[430](index=430&type=chunk) - Anti-takeover provisions in charter documents and Delaware law could make acquisitions more difficult and limit stockholder influence over management[431](index=431&type=chunk)[432](index=432&type=chunk)[434](index=434&type=chunk) - Exclusive forum provisions for certain disputes restrict stockholders' choice of judicial forum, potentially increasing costs and limiting influence[435](index=435&type=chunk)[436](index=436&type=chunk)[438](index=438&type=chunk) [Risks Related to Our Convertible Senior Notes](index=86&type=section&id=Risks%20Related%20to%20Our%20Convertible%20Senior%20Notes) The company may lack funds to settle convertible note conversions or repurchases, risking default, liquidity issues, and potential reclassification of debt - The company may not have sufficient cash or financing to settle conversions of notes in cash or repurchase them upon a fundamental change, potentially leading to default[439](index=439&type=chunk)[440](index=440&type=chunk) - If the conditional conversion feature is triggered, the company may be required to make cash payments, affecting liquidity, or reclassify debt as current, reducing net working capital[441](index=441&type=chunk) - Provisions in the indenture governing the notes, such as repurchase requirements or increased conversion rates upon a fundamental change, could delay or prevent a beneficial takeover attempt[443](index=443&type=chunk) [General Risk Factors](index=87&type=section&id=General%20Risk%20Factors) General risks include potential costly litigation, impact of analyst research on stock price, and business disruptions from catastrophic events - Future litigation, including intellectual property or employment claims, could be costly, time-consuming, and divert management's attention[444](index=444&type=chunk) - The market price and trading volume of Class A common stock are heavily influenced by analyst research; unfavorable or inaccurate research could cause decline[445](index=445&type=chunk)[446](index=446&type=chunk) - Catastrophic events (e.g., earthquakes, cyber-attacks, pandemics) could disrupt business operations, cause system interruptions, and harm reputation[447](index=447&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=88&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) No unregistered sales of equity securities were reported, and IPO proceeds use remains consistent with prior disclosures - No unregistered sales of equity securities occurred[450](index=450&type=chunk) - The use of proceeds from the June 2021 IPO (**$828.0 million gross**) has not materially changed from the initial prospectus[452](index=452&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=88&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) No defaults upon senior securities were reported - No defaults upon senior securities were reported[453](index=453&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=88&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) No mine safety disclosures were reported - No mine safety disclosures were reported[454](index=454&type=chunk) [ITEM 5. OTHER INFORMATION](index=88&type=section&id=ITEM%205.%20OTHER%20INFORMATION) No other information was reported - No other information was reported[455](index=455&type=chunk) [ITEM 6. EXHIBITS](index=89&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed with the Form 10-Q, including organizational documents, compensation plans, and certifications - Exhibits include Amended and Restated Certificate of Incorporation, Bylaws, Executive Officer Change in Control/Severance Benefit Plan, various certifications (e.g., 302, 906), and Inline XBRL documents[459](index=459&type=chunk) [Signatures](index=90&type=section&id=Signatures) The report is duly signed by the Chief Executive Officer, Chief Financial Officer, and Chief Accounting Officer of Confluent, Inc - The report is signed by Edward Jay Kreps (CEO), Steffan Tomlinson (CFO), and Ying Christina Liu (Chief Accounting Officer)[464](index=464&type=chunk)