Confluent(CFLT) - 2024 Q3 - Quarterly Report

Revenue and Growth - Confluent's revenue for the three months ended September 30, 2024 was $250.2 million, representing a 25% year-over-year growth[90] - Confluent's revenue for the nine months ended September 30, 2024 was$ 702.4 million, representing a 25% year-over-year growth[90] - Subscription revenue for Q3 2024 was $239.851 million, up from$ 189.270 million in Q3 2023[113] - Total revenue for Q3 2024 reached $250.199 million, compared to$ 200.181 million in Q3 2023[113] - Subscription revenue increased by $50.6 million (27%) to$ 239.9 million in Q3 2024 compared to Q3 2023, driven by sales to existing and new customers[118] - Total revenue grew by $50.0 million (25%) to$ 250.2 million in Q3 2024, with Confluent Cloud contributing 54% of subscription revenue[118] - Subscription revenue increased by $145.1 million (28%) to$ 671.5 million in the nine months ended September 30, 2024[131] - Total revenue grew by $138.7 million (25%) to$ 702.4 million in the nine months ended September 30, 2024[131] - Revenue for the nine months ended September 30, 2024 was $702.4 million, compared to$ 563.8 million for the same period in 2023[167] - Revenue for the year ended December 31, 2023 was $777.0 million, up from$ 585.9 million in 2022 and $387.9 million in 2021[167] - The company's revenue growth rate has declined at times and may continue to decline due to macroeconomic challenges and increased competition[167] - The company expects revenue growth rate to decline in future periods due to rapid revenue growth in prior periods[169] Customer Metrics - Confluent had approximately 5,680 customers as of September 30, 2024, representing a 16% year-over-year growth[90] - Confluent had 1,346 customers with$ 100,000 or greater in Annual Recurring Revenue (ARR) as of September 30, 2024[101] - Confluent's customer base grew from 4,910 to 5,680 customers from September 30, 2023 to September 30, 2024[90] - Confluent's customers with $100,000 or greater in ARR grew from 1,185 to 1,346 from September 30, 2023 to September 30, 2024[101] - Dollar-Based Net Retention Rate (NRR) was 117% as of September 30, 2024, indicating strong expansion within existing customers[102] - Dollar-based net retention rate was 117% as of September 30, 2024, indicating strong expansion from existing customers[118] - As of September 30, 2024, the company had 1,346 customers, with 1,229 customers having$ 100,000 or greater in ARR[230] - The company’s success depends on existing customers renewing subscriptions, expanding usage, and purchasing additional products, with dollar-based net retention rates historically fluctuating[234] Confluent Cloud - Confluent Cloud revenue represented 52% of total revenue for the three months ended September 30, 2024[94] - Confluent Cloud revenue represented 51% of total revenue for the nine months ended September 30, 2024[94] - Confluent Cloud revenue grew from 46% to 52% of total revenue from the three months ended September 30, 2023 to September 30, 2024[94] - Confluent Cloud revenue grew from 44% to 51% of total revenue from the nine months ended September 30, 2023 to September 30, 2024[94] - Confluent Cloud revenue growth is expected to fluctuate due to usage-based nature, customer adoption trends, and shift to a consumption-oriented sales model[177] - New customers acquired in 2023 tend to have lower initial consumption, potentially impacting revenue and growth rates[177] - Confluent Cloud historically had lower average pricing compared to Confluent Platform, affecting financial results[177] - Company targets small to medium-sized companies for faster deployment and shorter sales cycles for Confluent Cloud[179] - Larger enterprise customers' reduced consumption has negatively impacted Confluent Cloud growth and forecasts[179] - Fluctuations in Confluent Cloud usage under usage-based commitments and pay-as-you-go arrangements may impact financial results[186] - Customer retention and consumption expansion are critical for Confluent Cloud growth, particularly among large customers[186] - Confluent Cloud sales historically smaller, targeting small to medium-sized companies[191] - Larger Confluent Cloud sales may result in greater usage level variations[191] Financial Performance - Gross profit for Q3 2024 was $186.496 million, up from$ 143.632 million in Q3 2023[113] - Operating loss for Q3 2024 improved to $93.663 million from$ 108.632 million in Q3 2023[113] - Net loss for Q3 2024 was $74.144 million, compared to$ 92.670 million in Q3 2023[113] - Gross margin improved to 75% in Q3 2024 from 72% in Q3 2023[116] - Gross profit increased by $42.9 million (30%) to$ 186.5 million in Q3 2024, with total gross margin improving to 75%[119] - Total gross margin improved to 73% from 69% for the nine months ended September 30, 2024[133] - The company generated net losses of $442.7 million,$ 452.6 million, and $342.8 million for the years ended December 31, 2023, 2022, and 2021, respectively[170] - The company had an accumulated deficit of$ 1,901.2 million as of September 30, 2024[170] - Accumulated deficit stood at $1,901.2 million as of September 30, 2024[145] Expenses - Research and development expenses increased to$ 102.720 million in Q3 2024 from $91.237 million in Q3 2023[113] - Sales and marketing expenses rose to$ 137.968 million in Q3 2024 from $128.624 million in Q3 2023[113] - Research and development expenses rose by$ 11.5 million (13%) to $102.7 million in Q3 2024, primarily due to increased personnel costs[121] - Sales and marketing expenses increased by$ 9.3 million (7%) to $138.0 million in Q3 2024, driven by higher personnel and travel costs[122] - General and administrative expenses grew by$ 7.6 million (24%) to $39.5 million in Q3 2024, mainly due to increased personnel costs[124] - Research and development expenses increased by$ 44.5 million (17%) to $306.4 million for the nine months ended September 30, 2024[135][137] - Sales and marketing expenses increased by$ 17.2 million (4%) to $402.2 million for the nine months ended September 30, 2024[136][137] - General and administrative expenses increased by$ 13.8 million (13%) to $117.3 million for the nine months ended September 30, 2024[138][137] - Restructuring and other related charges decreased by$ 34.9 million (100%) for the nine months ended September 30, 2024[140][142] - Other income, net increased by $14.9 million (30%) to$ 65.2 million for the nine months ended September 30, 2024[141][142] Cash and Liquidity - Net cash used in operating activities decreased to $1.8 million from$ 115.9 million for the nine months ended September 30, 2024[146][148] - Cash and cash equivalents totaled $1,859.5 million as of September 30, 2024[145] - Cash, cash equivalents, and marketable securities totaled$ 1,859.5 million as of September 30, 2024[155] - Issued $1.1 billion in 0% convertible senior notes due 2027 in December 2021[155] Risks and Challenges - The company's business depends on existing customers renewing subscriptions and expanding usage of its offerings[166] - The company faces risks related to its dual-class stock structure, which concentrates voting control with pre-IPO stockholders[166] - The company faces competition from public cloud providers like AWS, Azure, and GCP, which could embed innovations or bundle competing products[183] - Open source alternatives, including Apache Kafka, pose significant competition in the data streaming platform market[183] - Company competes on factors like ease of deployment, cloud-native capabilities, and flexible pricing such as pay-as-you-go[184] - ARR calculation methodology changed in Q1 2023, impacting NRR and customers with over$ 100,000 in ARR[189] - Confluent Cloud revenue contribution increasing, leading to higher NRR volatility[189] - Revenue recognition timing less predictable due to customer flexibility in Confluent Cloud consumption[189] - Macroeconomic impacts causing longer sales cycles and consumption volatility from enterprise customers[191] - Significant portion of revenue recognized ratably over Confluent Platform subscription term[192] - Professional services business growth requires margin improvement to avoid harm to financial condition[198] - Seasonality affects RPO and new customer bookings, particularly in Q4[200] - Government sales subject to compliance challenges and risks, including FedRAMP authorization[202] - Potential challenges in integrating acquired businesses, technologies, and personnel[204] - Additional capital may be required to support business growth, with uncertain availability on favorable terms[205] - Increasing focus on ESG factors may impose additional costs and expose company to new risks[206] - Remote work environment increases risk of industrial espionage, phishing, and cybersecurity attacks[212] - Reliance on third-party service providers introduces cybersecurity risks, including supply-chain attacks[212] - Codecov Breach in April 2021 resulted in unauthorized access to private Github repositories containing source code[212] - Security incidents could lead to loss of customer confidence, legal liabilities, and adverse business impacts[214] - Security incidents and third-party data collection could undermine the company's competitive advantage and market position[215] - Potential defects or errors in the data streaming platform could damage customer businesses and harm the company's reputation[216] - Interruptions or performance problems in the offering may lead to customer loss and legal claims[217] - Growth depends on maintaining a reliable data streaming platform, with potential disruptions due to complexity or scale[218] - Compliance with evolving data privacy laws, such as CCPA and GDPR, could result in fines up to $7,500 per violation or 4% of global annual revenue[218][220] - Cross-border data transfer restrictions may increase operational costs and legal risks, with fines up to 1.2 billion Euros for non-compliance[220] - Use of GenAI technologies by employees may lead to additional compliance costs and regulatory actions[222] - Sales and marketing efforts are critical for expanding the customer base and achieving market adoption of Confluent Cloud[224] - Transition to a consumption-oriented sales model may cause attrition in the sales organization and impact revenue forecasts[224] - The company faces risks in pricing models, including potential adverse effects on revenue and margins due to economic conditions like high inflation or recession[227] - Enterprise customers often require longer sales cycles, complex requirements, and substantial upfront costs, leading to less predictability in sales completion[230] - The company’s market opportunity estimates and growth forecasts are subject to significant uncertainty and may not accurately predict future growth[230] - The company’s brand recognition is critical for growth, especially in the face of competition from open-source alternatives and major cloud providers like AWS, Azure, and GCP[226] - The company’s offering is complex, requiring significant time and resources to train and familiarize potential customers, with no guarantee of purchase[230] - The company’s agreements with customers include indemnity provisions that could expose it to substantial liability for intellectual property claims or data protection issues[238] - The company’s service-level commitments in customer agreements, if unmet, could lead to customer terminations, reduced renewals, and reputational damage[238] - The company uses third-party open source software like Apache Kafka and Apache Flink, which could lead to litigation or compliance issues[240] - Competitors may develop similar or superior products based on Apache Kafka or Apache Flink, potentially reducing market share and pricing power[242] - The company faces risks of intellectual property disputes, which could result in costly litigation or the need to redesign offerings[247] - The company’s limited patent portfolio may not deter infringement claims or provide competitive advantages[243] - Unauthorized use of the company’s proprietary technology by third parties could harm its business and financial condition[244] - The company may be required to publicly release proprietary source code if found non-compliant with open source licenses[240] - The company’s reliance on open source software exposes it to security risks and potential vulnerabilities[240] - Intellectual property rights in foreign countries may be less protective, increasing risks of unauthorized copying[244] - The company’s ability to enforce intellectual property rights may be limited due to legal uncertainties and enforcement challenges[243] - The company’s exposure to intellectual property claims is likely to grow as its market expands, increasing potential liabilities[247] - Confluent Cloud relies entirely on third-party cloud infrastructure providers AWS, Azure, and GCP, with any disruptions potentially harming the company's business and financial condition[249] - 40% of the company's revenue for the nine months ended September 30, 2024, and the year ended December 31, 2023, was generated from customers outside the United States[258] - Approximately 45% of the company's full-time employees are located outside the United States, with 18% in India and 8% in the UK as of September 30, 2024[258] - The company faces risks from currency exchange rate fluctuations, particularly as a strengthening U.S. dollar could increase the real cost of its offerings to international customers[261] - The company hedges a portion of operating expenses denominated in foreign currencies to mitigate risks from exchange rate fluctuations[261] - International expansion efforts may require establishing new channel partnerships, with failure to do so potentially hindering growth plans[258] - The company's reliance on SaaS technologies for critical business functions exposes it to risks from service interruptions or unavailability[252] - Competition for highly skilled personnel, especially in cloud infrastructure and sales, poses challenges to the company's growth and operations[255] - The company's international operations are subject to risks such as political instability, regulatory changes, and data privacy laws[260] - The company's growth strategy includes adapting to and developing strategies for international markets, but success is not guaranteed[258] - The company is subject to U.S. export controls and economic sanctions, which could delay or prevent sales to certain countries, impacting international market expansion[262] - The company faces risks related to anti-corruption and anti-bribery laws, with potential liabilities from third-party intermediaries or employees violating these laws[264] - International operations may lead to greater than anticipated tax liabilities due to challenges in transfer pricing and intercompany transactions[266] - Changes in tax laws, including the OECD/G20 Pillar Two 15% global minimum tax, could increase the company's tax expense in future years[267] - The company has net operating loss (NOL) carryforwards of$ 1,461.7 million (federal) and $798.1 million (state), with limitations on their utilization due to potential ownership changes[269][270] - The company’s effective tax rate could increase due to changes in tax laws, treaties, or the outcome of tax audits and examinations[271] - The dual-class stock structure concentrates 73.1% of voting power with Class B shareholders, limiting influence for Class A shareholders[275] - The CEO controls 22.0% of the company's voting power despite owning only 7.3% of the total shares[275] - Up to 26,047,378 shares of Class B and 22,337,563 shares of Class A may be issued upon exercise of stock options or vesting of RSUs[280] - 55,317,490 shares of Class A common stock are available for future issuance under the 2021 Plan and 2021 ESPP[280] - The company's 0% convertible senior notes due 2027 may dilute ownership if converted into Class A shares[280] - The company does not intend to pay dividends in the foreseeable future, relying solely on stock price appreciation for investor returns[280] - The company incurs significant costs for public company compliance, including Sarbanes-Oxley and Dodd-Frank Act requirements[280] - Anti-takeover provisions in the charter documents require 66 2/3% shareholder approval for certain amendments, limiting control changes[282] - Section 203 of Delaware law restricts business combinations with interested stockholders for three years[282] - The company's stock price may be volatile due to factors like financial performance, market conditions, and competitor actions[277] - The company's amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware and the federal district courts of the United States as exclusive forums for certain disputes[284] - The exclusive forum provisions may limit stockholders' ability to bring claims in favorable judicial forums[284] - The company expects to vigorously assert the validity and enforceability of the exclusive forum provisions in case of disputes[284] - Significant additional costs may be incurred if the exclusive forum provisions are found inapplicable or unenforceable[284] Strategic Initiatives - The company plans to expand to new international markets and grow within existing markets[169] - The company intends to continue significant investments in product development, including new offerings and features[170] - The company acquired WarpStream Labs, Inc. in September 2024, adding their BYOC data streaming solution to the offering[175] - Company acquired WarpStream in September 2024, integrating their BYOC data streaming solution[204] - Proceeds from IPO and convertible notes offering increase likelihood of larger and more complex acquisitions[204] - Published annual ESG Report since 2022, detailing greenhouse gas emissions and carbon neutrality efforts[208] Competition - Company faces competition from public cloud providers like AWS, Azure, and GCP, which could embed innovations or bundle competing products[183] - Open source alternatives, including Apache Kafka, pose significant competition in the data streaming platform market[183] - Company competes on factors like ease of deployment, cloud-native capabilities, and flexible pricing such as pay-as-you-go[184] - Competitors may develop similar or superior products based on Apache Kafka or Apache Flink, potentially reducing market share and