Confluent(CFLT) - 2025 Q2 - Quarterly Report

FORM 10-Q Filing Information This section details Confluent, Inc.'s quarterly report filing, including registrant information, registered securities, filer status, and outstanding shares Registrant Information Confluent, Inc.'s quarterly report as of June 30, 2025, details its Delaware registration and Mountain View, California headquarters - Company Name: CONFLUENT, INC.[2] - Place of Registration: Delaware[2] - Headquarters Address: 899 W. Evelyn Avenue, Mountain View, California 94041[2] Securities Registered The company's Class A Common Stock is listed and traded on The Nasdaq Global Select Market under the ticker symbol CFLT | Title of each class | Symbol(s) | Name of each exchange on which registered | | :------------------ | :-------- | :---------------------------------------- | | Class A Common Stock, par value $0.00001 per share | CFLT | The Nasdaq Stock Market LLC (Nasdaq Global Select Market) | Filer Status The company is a large accelerated filer, having submitted all required reports and interactive data files in the past 12 months - The company has filed all required reports and interactive data files within the past 12 months[2] | Large accelerated filer | x | Accelerated filer | o | | :-------------------- | :- | :---------------- | :- | | Non-accelerated filer | o | Smaller reporting company | o | | Emerging growth company | o | | | Outstanding Shares As of July 23, 2025, the company had 291,931,187 Class A and 52,812,935 Class B Common Stock shares outstanding - As of July 23, 2025, 291,931,187 shares of Class A Common Stock and 52,812,935 shares of Class B Common Stock were outstanding[3] SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS This section highlights the inherent risks and uncertainties associated with forward-looking statements in the report, advising investors against undue reliance Forward-Looking Statements Disclaimer This report contains numerous forward-looking statements with significant risks and uncertainties, where actual results may differ materially from expectations - All non-historical statements in this report are forward-looking, concerning future operating results, financial condition, business strategy, and management objectives[8] - Forward-looking statements are based on management's beliefs and assumptions, subject to known and unknown risks, uncertainties, and assumptions outlined in the 'Risk Factors' section[10] - The company does not guarantee the realization of events and circumstances reflected in forward-looking statements and assumes no obligation to update them[12] Key Areas of Forward-Looking Statements Forward-looking statements cover revenue, expenses, profitability, customer acquisition, product expansion, macroeconomic impacts, and market competition - Expectations regarding revenue, revenue mix, expenses, and other operating results[11] - Ability to acquire new customers and successfully retain existing customers[11] - Ability to increase product consumption (including data streaming platform) and expand functionality[11] - Ability to achieve or maintain profit margins and profitability[11] - Ability to operate the business and effectively manage growth in changing macroeconomic conditions, including inflationary pressures, geopolitical events, and recessionary environments[11] - Future investments in the business, anticipated capital expenditures, and estimates of capital requirements[11] - Costs and success of sales and marketing efforts, including the shift to a consumption-oriented sales model for Confluent Cloud, and the ability to promote the brand[11] - Platform growth strategies and market acceptance, and the ability to execute these strategies[11] - Estimated addressable market opportunity and the ability to penetrate that market[11] - Reliance on key personnel and the ability to identify, recruit, and retain skilled personnel[11] - Ability to effectively manage growth, including international expansion[11] - Ability to protect intellectual property and related costs[11] - Impact of public health crises[11] - Ability to compete effectively with existing competitors and new market entrants[11] - Growth rate of the competitive market[11] Where You Can Find More Information The company discloses important business and financial information via its investor relations website, SEC filings, webcasts, press releases, and public conference calls - The company publishes important business and financial information through its investor relations website (investors.confluent.io), SEC filings, webcasts, press releases, public conference calls, and blogs[14] - The company also uses X (Twitter), LinkedIn, and Facebook accounts to disclose material non-public information and fulfill Regulation FD disclosure obligations[15] PART I. FINANCIAL INFORMATION This section presents Confluent, Inc.'s unaudited condensed consolidated financial statements and management's discussion for the period ended June 30, 2025 ITEM 1. FINANCIAL STATEMENTS (UNAUDITED) This section presents Confluent, Inc.'s unaudited condensed consolidated financial statements for the period ended June 30, 2025, covering balance sheets, operations, comprehensive loss, equity, cash flows, and related notes Condensed Consolidated Balance Sheets As of June 30, 2025, total assets were $2,817,408 thousand, up 4.5% from December 31, 2024, with changes in cash, marketable securities, and accounts receivable | ASSETS (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------- | :------------ | :------------------ | | Cash and cash equivalents | $295,591 | $385,980 | | Marketable securities | $1,645,032 | $1,524,583 | | Accounts receivable, net | $357,607 | $314,306 | | Total current assets | $2,441,494 | $2,351,319 | | Total assets | $2,817,408 | $2,694,911 | | LIABILITIES AND STOCKHOLDERS' EQUITY (in thousands) | | | | Total current liabilities | $612,874 | $589,246 | | Convertible senior notes, net | $1,094,051 | $1,092,149 | | Total liabilities | $1,753,741 | $1,733,685 | | Total stockholders' equity | $1,063,667 | $961,226 | | Total liabilities and stockholders' equity | $2,817,408 | $2,694,911 | - As of June 30, 2025, total assets were $2,817,408 thousand, representing a 4.5% increase from December 31, 2024[19] - As of June 30, 2025, cash and cash equivalents decreased by 23.4%, marketable securities increased by 8.0%, and accounts receivable, net, increased by 13.8%[19] Condensed Consolidated Statements of Operations For the three months ended June 30, 2025, total revenue grew 20.1%, net loss narrowed to $81,950 thousand; for six months, revenue grew 22.4%, net loss narrowed to $149,524 thousand | (in thousands, except share and per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $282,285 | $234,986 | $553,405 | $452,223 | | Gross profit | $208,115 | $170,005 | $410,117 | $326,021 | | Operating loss | $(96,438) | $(108,349) | $(197,616) | $(219,700) | | Net loss | $(81,950) | $(89,900) | $(149,524) | $(182,867) | | Net loss per share, basic and diluted | $(0.24) | $(0.28) | $(0.44) | $(0.58) | - For the three months ended June 30, 2025, total revenue increased by 20.1% year-over-year, and net loss narrowed by 8.8% year-over-year[21] - For the six months ended June 30, 2025, total revenue increased by 22.4% year-over-year, and net loss narrowed by 18.2% year-over-year[21] Condensed Consolidated Statements of Comprehensive Loss For the three months ended June 30, 2025, comprehensive loss narrowed to $74,755 thousand; for six months, it significantly narrowed to $136,828 thousand, driven by unrealized gains on derivatives | (in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(81,950) | $(89,900) | $(149,524) | $(182,867) | | Other comprehensive income (loss), net of tax | $7,195 | $232 | $12,696 | $(3,371) | | Total comprehensive loss | $(74,755) | $(89,668) | $(136,828) | $(186,238) | - For the three months ended June 30, 2025, other comprehensive income (loss) net of tax was $7,195 thousand, primarily from unrealized gains on derivative instruments[24] - For the six months ended June 30, 2025, other comprehensive income (loss) net of tax was $12,696 thousand, a significant improvement from a $3,371 thousand loss in the prior year period[24] Condensed Consolidated Statements of Stockholders' Equity As of June 30, 2025, total stockholders' equity was $1,063,667 thousand, up 10.7% from January 1, 2025, driven by additional paid-in capital and positive accumulated other comprehensive income | (in thousands, except share data) | Balances as of January 1, 2025 | Balances as of June 30, 2025 | | :-------------------------------- | :----------------------------- | :--------------------------- | | Additional Paid-In Capital | $2,953,080 | $3,192,349 | | Accumulated Other Comprehensive Income (Loss) | $(2,641) | $10,055 | | Accumulated Deficit | $(1,989,216) | $(2,138,740) | | Total Stockholders' Equity | $961,226 | $1,063,667 | - As of June 30, 2025, additional paid-in capital increased by $239,269 thousand, primarily from equity incentive plans and employee stock purchase plans[29] - Accumulated other comprehensive income (loss) shifted from a $2,641 thousand loss on January 1, 2025, to a $10,055 thousand gain[29] Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2025, operating cash outflow decreased, investing cash outflow increased, and financing cash inflow decreased, leading to a net $90,389 thousand reduction in cash and cash equivalents | (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(8,639) | $(17,364) | | Net cash used in investing activities | $(120,492) | $(63,296) | | Net cash provided by financing activities | $36,863 | $43,100 | | Net decrease in cash and cash equivalents | $(90,389) | $(38,433) | | Cash and cash equivalents at end of period | $295,591 | $311,328 | - Net cash used in operating activities decreased from $17,364 thousand in the prior year period to $8,639 thousand in 2025, primarily due to a narrower net loss and increased deferred revenue[32][173][174] - Net cash used in investing activities increased from $63,296 thousand in the prior year period to $120,492 thousand in 2025, mainly due to increased purchases of marketable securities[32][175][176] - Net cash provided by financing activities decreased from $43,100 thousand in the prior year period to $36,863 thousand in 2025, primarily from common stock issuances[32][177][178] Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the condensed consolidated financial statements, covering business description, accounting policies, marketable securities, financial instrument fair value, derivatives, balance sheet components, business combinations, convertible senior notes, commitments, revenue, equity, income taxes, and net loss per share Note 1. Organization and Description of Business Confluent, Inc. offers a data streaming platform, including Confluent Cloud (SaaS), Confluent Platform (self-managed), and WarpStream (BYOC hosted service), complemented by professional and educational services - The company provides a data streaming platform, including Confluent Cloud (SaaS), Confluent Platform (self-managed software), and WarpStream (BYOC hosted service)[36] - The company also offers professional and educational services[36] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This section outlines the financial statement presentation basis, management's estimates, single operating segment confirmation, and recent unadopted accounting standard updates for income taxes and comprehensive income - Financial statements are prepared in accordance with GAAP and SEC rules for interim financial reporting, including normal recurring adjustments deemed necessary by management[37][38] - The company operates as a single operating and reporting segment, with the CEO using consolidated net loss as the primary performance measure[42] - FASB issued ASU No. 2023-09, requiring disaggregated income tax paid disclosures and standard categories for effective tax rate reconciliations, effective for fiscal years beginning after December 15, 2024[44] - FASB issued ASU No. 2024-03, requiring additional disclosures for certain costs and expenses in consolidated financial statement notes, effective for fiscal years beginning after December 15, 2026[45] Note 3. Marketable Securities As of June 30, 2025, total marketable securities were $1,645,032 thousand, mainly U.S. treasury securities, corporate notes, and bonds, with most maturing within one year | (in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | | :-------------------- | :------------- | :--------------- | :---------------- | :--------- | | U.S. treasury securities | $769,320 | $523 | $(264) | $769,579 | | Corporate notes and bonds | $480,542 | $1,727 | $(68) | $482,201 | | U.S. agency obligations | $272,414 | $334 | $(208) | $272,540 | | Commercial paper | $109,873 | $— | $— | $109,873 | | Time deposits | $10,839 | $— | $— | $10,839 | | Total marketable securities | $1,642,988 | $2,584 | $(540) | $1,645,032 | - As of June 30, 2025, total marketable securities amounted to $1,645,032 thousand, with $1,071,920 thousand maturing within one year[46][48] - The company does not intend to sell securities in an unrealized loss position and believes their fair value decline is not credit-related[47] Note 4. Fair Value of Financial Instruments As of June 30, 2025, financial assets and liabilities fair value totaled $1,908,571 thousand, mainly Level 1 money market funds and Level 2 securities and derivatives, with convertible senior notes at $1,025.7 million | (in thousands) | Level 1 | Level 2 | Total | | :-------------------------------- | :------ | :------ | :------ | | Assets: | | | | | Money market funds | $204,171 | $— | $204,171 | | Commercial paper | $— | $41,811 | $41,811 | | U.S. treasury securities | $— | $769,579 | $769,579 | | Corporate notes and bonds | $— | $482,201 | $482,201 | | U.S. agency obligations | $— | $272,540 | $272,540 | | Commercial paper | $— | $109,873 | $109,873 | | Time deposits | $— | $10,839 | $10,839 | | Foreign currency forward contracts | $— | $11,813 | $11,813 | | Total assets | $204,171 | $1,704,400 | $1,908,571 | | Liabilities: | | | | | Foreign currency forward contracts | $— | $1,583 | $1,583 | | Total liabilities | $— | $1,583 | $1,583 | - As of June 30, 2025, the estimated fair value of the company's 0% Convertible Senior Notes due 2027 was $1,025.7 million, classified as Level 2[51] Note 5. Derivative Instruments and Hedging The company uses foreign currency forward contracts to hedge exchange rate risks, with total notional derivatives of $368,010 thousand as of June 30, 2025, and $8.0 million in net unrealized gains from designated hedging contracts in accumulated other comprehensive income - The company uses foreign currency forward contracts to hedge the impact of foreign currency fluctuations on future cash flows and earnings[52] | (in thousands) | June 30, 2025 | December 31, 2024 | | :---------------------------------------------------- | :------------ | :------------------ | | Foreign currency forward contracts designated as hedging instruments | $194,706 | $180,754 | | Foreign currency forward contracts not designated as hedging instruments | $173,304 | $95,191 | | Total derivative instruments | $368,010 | $275,945 | - As of June 30, 2025, accumulated other comprehensive income (loss) included $8.0 million in net unrealized gains related to foreign currency forward contracts designated as hedging instruments, with $6.2 million expected to be reclassified to earnings within the next 12 months[55] Note 6. Balance Sheet Components This section details key balance sheet components, with property and equipment, net, at $86,962 thousand and accrued expenses and other liabilities at $167,839 thousand as of June 30, 2025 Property and Equipment, Net As of June 30, 2025, net property and equipment totaled $86,962 thousand, mainly capitalized internal-use software costs, with increased depreciation and amortization expenses in Q2 and H1 2025 | (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :------------------ | | Capitalized internal-use software costs | $97,072 | $74,395 | | Construction in progress - capitalized internal-use software costs | $28,853 | $33,731 | | Property and equipment, at cost | $141,953 | $122,253 | | Less: Accumulated depreciation and amortization | $(54,991) | $(43,573) | | Property and equipment, net | $86,962 | $78,680 | - As of June 30, 2025, property and equipment, net, was $86,962 thousand, an increase of 10.5% from December 31, 2024[57] - Depreciation and amortization expense for Q2 2025 was $6.1 million, up 15.1% year-over-year; for H1 2025, it was $12.2 million, up 34.1% year-over-year[57] Accrued Expenses and Other Liabilities As of June 30, 2025, total accrued expenses and other liabilities were $167,839 thousand, decreasing from December 31, 2024, primarily due to reduced accrued compensation and payroll taxes | (in thousands) | June 30, 2025 | December 31, 2024 | | :-------------------------------- | :------------ | :------------------ | | Accrued compensation and benefits | $53,297 | $76,308 | | Accrued income taxes | $34,406 | $27,313 | | Accrued expenses | $27,123 | $17,771 | | Accrued commissions | $16,623 | $22,735 | | Employee contributions under employee stock purchase plan | $10,723 | $12,606 | | Accrued payroll taxes | $6,597 | $15,940 | | Other liabilities | $19,070 | $21,577 | | Total accrued expenses and other liabilities | $167,839 | $194,250 | - As of June 30, 2025, accrued compensation and benefits decreased by 30.2%, and accrued payroll taxes decreased by 58.6%[58] Note 7. Business Combinations, Goodwill, and Intangible Assets This section details the company's 2024 and 2023 business combinations, including WarpStream Labs and Immerok GmbH acquisitions, and the recognition of goodwill and intangible assets, with WarpStream Labs generating $112.4 million in goodwill - In September 2024, the company acquired WarpStream Labs for a total consideration of $135.1 million, with $112.4 million recognized as goodwill[59][60] - Deferred compensation expenses related to the WarpStream Labs acquisition (restricted Class A common stock and cash) were $7.6 million for Q2 2025 and $15.2 million for H1 2025[61] - In January 2023, the company acquired Immerok GmbH for $54.9 million in cash[63] - As of June 30, 2025, and December 31, 2024, the carrying value of goodwill was $164.4 million[65] | Intangible Assets, Net (in thousands) | June 30, 2025 | December 31, 2024 | | :------------------------------------ | :------------ | :------------------ | | Developed technology | $6,997 | $7,924 | | Total | $6,997 | $7,924 | Note 8. Convertible Senior Notes In December 2021, the company issued $1.1 billion of 0% convertible senior notes due 2027, convertible under specific conditions with capped call options to reduce dilution, and a net carrying value of $1,094,051 thousand as of June 30, 2025 - In December 2021, the company issued $1.1 billion of 0% convertible senior notes due 2027, raising net proceeds of $1,080.5 million[68] - The initial conversion rate was 9.9936 shares of Class A common stock per $1,000 principal amount, with an initial conversion price of approximately $100.06 per share[69] - As of June 30, 2025, the net carrying value of the convertible senior notes was $1,094,051 thousand[75] - The company entered into capped call option transactions to reduce potential dilution of Class A common stock upon conversion of the notes, at a cost of $91.0 million, recorded in stockholders' equity[76] Note 9. Commitments and Contingencies The company has non-cancelable operating leases and a $125 million service procurement obligation in H1 2025, with no material adverse legal proceedings or claims identified as of June 30, 2025 - The company has non-cancelable operating leases, primarily for office space, with terms extending through 2029[77] - In the first half of 2025, the company entered into a $125 million service agreement, committing to payments over the next five years[79] - As of June 30, 2025, the company was not aware of any legal proceedings or claims that would have a material adverse effect on its operating results, financial condition, or cash flows[80] Note 10. Revenue For the three months ended June 30, 2025, total revenue was $282,285 thousand, with 96% from subscriptions and 53% of subscription revenue from Confluent Cloud; RPO was $1,162.3 million, with 59% expected within 12 months | (dollars in thousands) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $164,348 (58%) | $143,246 (61%) | $320,760 (58%) | $270,656 (60%) | | International | $117,937 (42%) | $91,740 (39%) | $232,645 (42%) | $181,567 (40%) | | Total revenue | $282,285 (100%) | $234,986 (100%) | $553,405 (100%) | $452,223 (100%) | | Confluent Platform - License | $30,630 (11%) | $26,958 (12%) | $61,688 (11%) | $46,325 (10%) | | Confluent Platform - PCS | $89,678 (32%) | $80,381 (34%) | $176,788 (32%) | $161,074 (36%) | | Confluent Cloud | $150,524 (53%) | $117,363 (50%) | $293,266 (53%) | $224,205 (49%) | | Subscription | $270,832 (96%) | $224,702 (96%) | $531,742 (96%) | $431,604 (95%) | | Services | $11,453 (4%) | $10,284 (4%) | $21,663 (4%) | $20,619 (5%) | | Total revenue | $282,285 (100%) | $234,986 (100%) | $553,405 (100%) | $452,223 (100%) | - As of June 30, 2025, remaining performance obligations (RPO) totaled $1,162.3 million, with approximately 59% expected to be recognized as revenue within the next 12 months[84] - As of June 30, 2025, total deferred revenue was $455.6 million, an 11.3% increase from December 31, 2024[85] Note 11. Stockholders' Equity This section details stockholders' equity, including Class A and B common stock voting differences, share reserves under equity incentive and employee stock purchase plans, and $554.3 million in unrecognized stock-based compensation expense as of June 30, 2025 - The company has Class A and Class B common stock, with Class A having one vote per share and Class B having ten votes per share; Class B shares are convertible into Class A under specific conditions[90][91] | (shares) | June 30, 2025 | December 31, 2024 | | :------------------------------------------ | :------------ | :------------------ | | Options outstanding | 19,906,898 | 23,142,966 | | Restricted stock units outstanding | 23,404,364 | 20,277,922 | | Remaining shares available for future issuance | 51,104,256 | 44,279,867 | | 2021 Employee Stock Purchase Plan | 12,708,562 | 10,139,193 | | Total | 107,146,635 | 98,140,408 | - As of June 30, 2025, unrecognized stock-based compensation expense was $554.3 million, expected to be recognized over a weighted-average period of 1.6 years[102] Note 12. Income Taxes For the three months ended June 30, 2025, income tax expense was $6.6 million; for six months, income tax benefit was $6.6 million, mainly due to the release of a $16.4 million UK deferred tax asset valuation allowance in Q1 2025 - For the three months ended June 30, 2025, income tax expense was $6.6 million, primarily from foreign, federal, and state income taxes[106] - For the six months ended June 30, 2025, income tax benefit was $6.6 million, primarily attributed to the release of a $16.4 million valuation allowance on UK deferred tax assets in Q1 2025[106] - The company continues to maintain a full valuation allowance against its U.S. deferred tax assets[106] Note 13. Net Loss Per Share For the three and six months ended June 30, 2025, basic and diluted net loss per share were $0.24 and $0.44, respectively, with all potentially dilutive shares excluded from diluted EPS due to the net loss | (in thousands, except share and per share data) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(81,950) | $(89,900) | $(149,524) | $(182,867) | | Weighted-average shares used to compute net loss per share, basic and diluted | 341,208,548 | 319,415,586 | 338,491,146 | 316,809,384 | | Net loss per share, basic and diluted | $(0.24) | $(0.28) | $(0.44) | $(0.58) | - As of June 30, 2025, 55,315,428 potentially dilutive shares, including stock options, unvested restricted common stock, RSUs, ESPP, and convertible senior notes, were excluded from diluted net loss per share calculation as their effect was anti-dilutive[109] Note 14. Subsequent Events On July 4, 2025, the 'One Big Beautiful Bill Act' became law, allowing immediate expensing of domestic R&D and certain capital expenditures, and changing foreign business profit taxation; the company is evaluating its impact, with accounting effects expected from the quarter ending September 30, 2025 - On July 4, 2025, the 'One Big Beautiful Bill Act' was signed into law, allowing immediate expensing of domestic R&D expenses and certain capital expenditures, and changing the taxation of foreign business profits[111] - The company is evaluating the impact of this new legislation, with accounting effects expected to be recognized starting from the fiscal quarter ending September 30, 2025[111] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial condition and operating results for the three and six months ended June 30, 2025, covering its business overview, macroeconomic impacts, key performance factors, business metrics, operational components, and liquidity and capital resources Overview Confluent, a pioneer in data streaming platforms, enables organizations to stream, connect, process, and govern data in real-time, acting as a central nervous system for real-time applications - Confluent pioneered the data streaming platform category, aiming to provide data streams for the world to operate and analyze in real-time[113] - The data streaming platform offers four key capabilities—streaming, connecting, processing, and governance—serving as the central nervous system for an enterprise's real-time data[114] - Company revenue primarily derives from data streaming platform subscription sales, including Confluent Cloud (SaaS), Confluent Platform (self-managed software), and WarpStream (BYOC hosted service)[115] Business and Macroeconomic Conditions The company's business is continuously affected by macroeconomic uncertainties like inflation, interest rate fluctuations, and geopolitical events, resulting in extended sales cycles, IT budget cuts, and slower customer consumption growth - The company's business and financial condition are continuously impacted by macroeconomic uncertainties such as inflation, interest rates, and geopolitical events[118] - Extended sales cycles[118] - Reduced IT budgets[118] - Slower customer consumption expansion and growth rates[118] - Fluctuations in large enterprise customer consumption[118] Key Factors Affecting Our Performance Company performance is influenced by product development, Confluent Cloud adoption, customer base expansion, revenue retention, and disciplined investment, amidst increased IT spending scrutiny due to macroeconomic uncertainties - Continued investment in the data streaming platform to develop market-leading products, such as the Kora engine, Apache Flink cloud-native service, and Stream Governance suite, to increase customer adoption and usage[121] - Confluent Cloud represents a significant growth opportunity, encouraged by free trials and a pay-as-you-go model, with its revenue contribution continuously growing[122] - Focus on acquiring new customers and expanding customer reach through sales and marketing efforts, developer community promotion, and a consumption-oriented sales model[123] - Business growth relies on customer renewals and increased consumption and subscriptions from existing customers, but macroeconomic uncertainties lead to fluctuations in large enterprise customer consumption and slower expansion of new use cases[124] - Adoption of a disciplined investment strategy, balancing business growth with optimization of profitability, margins, and cash flow, to address market opportunities and challenges[125] Key Business Metrics The company measures performance via subscription revenue, customers with over $100,000 ARR, and NRR, reporting 1,439 customers with over $100,000 ARR and an NRR of 114% as of June 30, 2025 - Subscription revenue reflects the company's business performance, including contractual commitments for Confluent Platform and consumption for Confluent Cloud and WarpStream[127] | Metric | June 30, 2025 | June 30, 2024 | | :---------------------------------------------------- | :------------ | :------------ | | Customers with $100,000 or Greater in Annual Recurring Revenue ("ARR") | 1,439 | 1,306 | | Dollar-Based Net Retention Rate ("NRR") | 114% | N/A | - The Dollar-Based Net Retention Rate (NRR) of 114% indicates the company's ability to expand within existing customers, though it may be suppressed in the short term due to the shift to a consumption-oriented sales model and consumption fluctuations[129] Components of Results of Operations Company revenue primarily stems from subscription services, with costs including related expenses; gross profit and margins are influenced by revenue mix and cloud infrastructure; operating expenses cover R&D, sales, marketing, and G&A; other income includes interest and foreign exchange; and income tax expense is affected by jurisdictions and valuation allowances - Subscription revenue primarily comes from Confluent Cloud (recognized by usage), Confluent Platform (partially recognized immediately for licenses, most PCS revenue amortized over contract term), and WarpStream[131] - Services revenue is derived from professional and educational services, recognized as services are delivered[132] - Costs of subscription include personnel, cloud infrastructure, internal-use software amortization; costs of services include personnel, third-party consultants[134] - Gross margin is affected by average selling prices for subscriptions and services, revenue mix, cloud infrastructure usage, and investments[137] - Operating expenses are primarily composed of personnel-related costs, including research and development, sales and marketing, and general and administrative expenses[138] - Other income, net, primarily includes interest income from cash and marketable securities, amortization of debt issuance costs, and fair value changes of derivative instruments[142] - Income tax expense is influenced by foreign and U.S. federal and state income taxes; the valuation allowance on UK deferred tax assets has been released, but a full valuation allowance is maintained against U.S. deferred tax assets[143] Results of Operations This section compares the company's operating results for the three and six months ended June 30, 2025, versus the prior year, showing improvements in revenue, gross profit, and operating loss, alongside continued investment in product development and market expansion Comparison of the Three Months Ended June 30, 2025 and 2024 For the three months ended June 30, 2025, total revenue increased 20% year-over-year, subscription revenue grew 21% from existing customers; gross profit rose 22%, and operating loss narrowed 11.0%, despite increased R&D and sales and marketing expenses | (in thousands, except percentages) | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | Change ($) | Change (%) | | :--------------------------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Subscription Revenue | $270,832 | $224,702 | $46,130 | 21% | | Services Revenue | $11,453 | $10,284 | $1,169 | 11% | | Total Revenue | $282,285 | $234,986 | $47,299 | 20% | | Total Cost of Revenue | $74,170 | $64,981 | $9,189 | 14% | | Gross Profit | $208,115 | $170,005 | $38,110 | 22% | | Research and Development | $121,221 | $106,060 | $15,161 | 14% | | Sales and Marketing | $143,631 | $132,865 | $10,766 | 8% | | General and Administrative | $39,701 | $39,429 | $272 | 1% | | Other Income, Net | $21,109 | $21,853 | $(744) | (3)% | | Provision for Income Taxes | $6,621 | $3,404 | $3,217 | 95% | - Subscription revenue growth was primarily driven by existing customers, with a Dollar-Based Net Retention Rate of 114%; Confluent Cloud and Confluent Platform contributed 56% and 44% of subscription revenue, respectively[146] - Subscription gross margin increased from 76% to 77%, and services gross margin improved from (18)% to (15)%, primarily due to improved personnel-related cost efficiency[149][151] Comparison of the Six Months Ended June 30, 2025 and 2024 For the six months ended June 30, 2025, total revenue increased 22% year-over-year, subscription revenue grew 23% from existing customers; gross profit rose 26%, and operating loss narrowed 10.0%, despite increased R&D and sales and marketing expenses | (in thousands, except percentages) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | Change ($) | Change (%) | | :--------------------------------- | :----------------------------- | :----------------------------- | :--------- | :--------- | | Subscription Revenue | $531,742 | $431,604 | $100,138 | 23% | | Services Revenue | $21,663 | $20,619 | $1,044 | 5% | | Total Revenue | $553,405 | $452,223 | $101,182 | 22% | | Total Cost of Revenue | $143,288 | $126,202 | $17,086 | 14% | | Gross Profit | $410,117 | $326,021 | $84,096 | 26% | | Research and Development | $238,022 | $203,631 | $34,391 | 17% | | Sales and Marketing | $289,890 | $264,217 | $25,673 | 10% | | General and Administrative | $79,821 | $77,873 | $1,948 | 3% | | Other Income, Net | $41,519 | $42,703 | $(1,184) | (3)% | | (Benefit from) Provision for Income Taxes | $(6,573) | $5,870 | $(12,443) | (212)% | - Subscription revenue growth was primarily driven by existing customers, with a Dollar-Based Net Retention Rate of 114%; Confluent Cloud and Confluent Platform contributed 55% and 45% of subscription revenue, respectively[157] - Subscription gross margin increased from 77% to 78%, and services gross margin improved from (21)% to (17)%, primarily due to improved personnel-related cost efficiency[159][161] - The income tax benefit was primarily attributed to the release of a $16.4 million valuation allowance on UK deferred tax assets in Q1 2025[166] Liquidity and Capital Resources As of June 30, 2025, the company's primary liquidity sources were cash, cash equivalents, and marketable securities, totaling $1,940.6 million, expected to meet short-term and long-term needs, though additional financing may be required for future growth - As of June 30, 2025, the company's cash, cash equivalents, and marketable securities totaled $1,940.6 million[169] - The company expects its existing liquidity to be sufficient to meet short-term and long-term operating and capital requirements, including purchase obligations and operating lease commitments[169] - As of June 30, 2025, the company had an accumulated deficit of $2,138.7 million, and may require additional equity or debt financing in the future to support business growth[170] | (in thousands) | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(8,639) | $(17,364) | | Net cash used in investing activities | $(120,492) | $(63,296) | | Net cash provided by financing activities | $36,863 | $43,100 | Critical Accounting Estimates The company relies on various estimates and assumptions in preparing its financial statements, which may impact reported amounts; no significant changes to critical accounting estimates occurred in this quarterly report - Preparing financial statements requires management to make estimates and assumptions affecting the reported amounts of assets, liabilities, revenue, costs, expenses, and related disclosures[179] - No significant changes to critical accounting estimates occurred in this quarterly report[180] Recent Accounting Pronouncements This section refers to recent accounting pronouncements disclosed in Note 2 to the financial statements, regarding improvements in income tax and comprehensive income reporting - Details of recent accounting pronouncements are available in Note 2 to the Condensed Consolidated Financial Statements[181] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The company faces interest rate and foreign currency risks; as of June 30, 2025, it held $1,940.6 million in cash, cash equivalents, and marketable securities, with hypothetical interest rate changes not significantly impacting fair value, and foreign currency risk managed through forward contracts Interest Rate Risk As of June 30, 2025, the company held $1,940.6 million in cash, cash equivalents, and marketable securities; a hypothetical 100 basis point interest rate change would not materially impact their fair value, and convertible senior notes' fair value does not affect the company's financial position or cash flows - As of June 30, 2025, the company held $1,940.6 million in cash, cash equivalents, and marketable securities[184] - A hypothetical 100 basis point change in interest rates would not materially impact the fair value of cash equivalents and marketable securities[184] - The fair value of convertible senior notes is subject to market risk, but due to the fixed nature of the debt obligation, it does not affect the company's financial condition, cash flows, or operating results[185] Foreign Currency Risk Most sales contracts are USD-denominated, limiting revenue exposure to foreign exchange risk; however, non-USD operating expenses and balance sheet items create exposure, mitigated but not eliminated by hedging programs - Most of the company's sales contracts are denominated in U.S. dollars, so revenue is not significantly exposed to foreign currency risk[186] - Some operating expenses and balance sheet items are denominated in non-U.S. dollar currencies, creating exposure to foreign currency fluctuations[186] - The company has established hedging programs to mitigate the impact of foreign currency fluctuations, but cannot entirely eliminate the risk[187] ITEM 4. CONTROLS AND PROCEDURES Management assessed the effectiveness of disclosure controls and procedures as of the quarter-end, concluding they are effective at a reasonable assurance level, with no significant changes to internal control over financial reporting during the period Evaluation of Disclosure Controls and Procedures Management, with the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of the end of the quarter, concluding they are effective at a reasonable assurance level - Management evaluated the effectiveness of disclosure controls and procedures as of the end of the quarter[189] - The Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures are effective at a reasonable assurance level[189] Changes in Internal Control over Financial Reporting No changes in internal control over financial reporting occurred during the quarter that materially affected or are reasonably likely to materially affect the company's internal control - No changes in internal control over financial reporting occurred during the quarter that materially affected or are reasonably likely to materially affect the company's internal control[190] Inherent Limitations on Effectiveness of Controls Management believes disclosure controls and internal control over financial reporting provide reasonable, not absolute, assurance, acknowledging inherent limitations that prevent preventing or detecting all errors and fraud - Management believes disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance, rather than absolute assurance[191] - Any control system has inherent limitations and cannot prevent or detect all errors and fraud[191] PART II. OTHER INFORMATION This section covers other information not included in the financial statements, such as legal proceedings, risk factors, sales of unregistered equity securities, defaults, mine safety disclosures, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any legal proceedings materially adversely affecting its business, operating results, financial condition, or cash flows, though litigation carries cost and management distraction risks - The company is not currently involved in any legal proceedings that would have a material adverse effect on its business, operating results, financial condition, or cash flows[193] - Litigation is costly, can distract management and employees, and its outcome is uncertain[193] ITEM 1A. RISK FACTORS Investing in the company's Class A common stock involves high risks, including business growth uncertainties, ongoing losses, macroeconomic impacts, product market acceptance, cloud service reliance, sales and marketing efficiency, customer retention, intellectual property protection, third-party dependencies, talent management, international operations, tax and regulatory environments, accounting policies, and equity ownership risks Risk Factors Summary This section summarizes key risks of investing in the company's Class A common stock, including unsustainable growth, ongoing losses, macroeconomic uncertainties, product market acceptance, cloud service reliance, sales and marketing efficiency, customer retention, brand maintenance, market competition, financial volatility, cybersecurity, third-party cloud infrastructure dependence, and concentrated voting power from its dual-class stock structure - Historical rapid growth may not be indicative of future growth and may increase the risk of the company's unsuccessfulness[196] - The company has a history of operating losses and may not achieve or maintain profitability in the future[196] - Macroeconomic uncertainties and unfavorable conditions (including geopolitical conflicts, IT spending cuts, inflation) have affected and will continue to affect the company's business growth and operating results[196] - Failure of the company's products to meet customer needs or to gain sustained market acceptance against competition (including open-source alternatives) will harm the business[196] - The company will continue to invest heavily in Confluent Cloud, data streaming platform capabilities, and BYOC offerings; failure to achieve further market adoption or consumption growth will harm the business[196] - Failure to effectively develop and expand sales and marketing capabilities or improve their productivity will harm the company's ability to expand its pipeline and sales channels[196] - The company's business depends on existing customers renewing subscriptions and usage commitments, purchasing additional subscriptions and commitments, and expanding their product usage[196] - Failure to maintain and enhance the brand (including among developers) will harm the company's ability to expand its customer base[196] - The market in which the company operates is highly competitive, and failure to compete effectively will harm the business[196] - Financial results and key metrics are expected to fluctuate, making future results difficult to predict, and failure to meet expectations may cause stock price decline[196] - Security incidents at the company or its third-party partners could lead to reputational damage, reduced demand, regulatory investigations, litigation, fines, business disruption, and other adverse consequences[198] - The company relies on third-party cloud infrastructure to host Confluent Cloud, and any disruptions or limitations could adversely affect the business[198] - The dual-class stock structure in the company's charter concentrates voting control with pre-IPO stockholders (including executives, employees, and directors and their affiliates), limiting investors' ability to influence company affairs[198] Risks Related to Our Business and Operations This section details risks to business and operations, including unsustainable historical growth, ongoing operating losses, macroeconomic uncertainties, insufficient product market acceptance, reliance on Confluent Cloud and BYOC investments, declining Confluent Platform market acceptance, growth management challenges, intense market competition, financial performance volatility, and changes in revenue mix - The company's historical rapid growth (H1 2025 revenue of $553.4 million, up 22% year-over-year) should not be considered indicative of future performance, and growth rates may decline due to various factors[117][197][200] - The company has incurred net losses since inception (accumulated deficit of $2,138.7 million as of June 30, 2025) and may not achieve or maintain profitability in the future[202] - Macroeconomic uncertainties (e.g., inflation, high interest rates, geopolitical conflicts) have led to extended sales cycles, IT budget cuts, and slower customer consumption growth, negatively impacting the business[118][206] - The company's growth depends on market adoption and consumption growth of Confluent Cloud and BYOC offerings, but it has limited experience in marketing, pricing, and selling these products, which could lead to financial performance fluctuations[209][210][211][212] - The market in which the company operates is highly competitive, with key competitors including internal IT teams (using open-source software like Apache Kafka) and large public cloud providers (e.g., AWS, Azure, GCP)[215][216][217] - The company's financial results and key metrics (e.g., subscription revenue, NRR) are expected to fluctuate, influenced by changes in revenue mix, customer consumption volatility, sales cycles, investment timing, seasonality, and macroeconomic conditions[222][223][224] Risks Related to Cybersecurity The company faces increasing cybersecurity threats, including cyberattacks, ransomware, employee errors, and third-party vulnerabilities, potentially leading to data breaches, business disruption, reputational damage, regulatory investigations, litigation, and fines; customer security failures under a shared responsibility model could also adversely affect the company - The company and its third-party partners handle sensitive data and face various security threats, including cyberattacks, ransomware, social engineering, supply chain attacks, and employee errors or malicious acts[250] - As a data streaming software company, it faces unique threats from product vulnerabilities and customer misuse[252] - The company employs a shared responsibility model, where customers are responsible for using, configuring, and implementing platform security measures; failure by customers to properly implement these could impact customer relationships, reputation, and revenue[257] - Security incidents could result in loss of customer confidence, brand damage, reduced demand, business disruption, proprietary data breaches, legal liabilities (including litigation, regulatory enforcement, fines), and impaired financial performance[258] - The company also faces compliance risks from increasingly stringent domestic and international data privacy and security laws and regulations (e.g., CCPA, EU GDPR, UK GDPR), with non-compliance potentially leading to regulatory actions, litigation, and fines[266][267][268][269][270][271][272][273][274] Risks Related to Our Sales and Marketing Efforts and Brand Failure to effectively develop and expand sales and marketing capabilities or improve their productivity could harm the company's ability to expand its customer base and achieve broader market acceptance; additionally, failure to maintain and enhance its brand, especially within the developer community, and limited experience with pricing models, could adversely affect revenue and operating results - Failure to effectively develop and expand sales and marketing capabilities or improve their productivity could harm the company's ability to expand its pipeline and sales channels, increase its customer base, and achieve broader market acceptance for its products[275] - Failure to maintain and enhance the Confluent brand (including among developers) will harm the company's ability to expand its customer base and could adversely affect its business, financial condition, and operating results[276] - The company's limited experience with pricing models, especially in high-inflation or uncertain economic environments, may necessitate adjustments to pricing terms, thereby adversely affecting revenue and operating results[277] - Selling to enterprise customers involves longer sales cycles, more complex customer requirements, and higher upfront sales costs, leading to unpredictability in sales completion and revenue recognition[278][279] Risks Related to Our Customers Failure to attract new customers or expand sales channels will adversely affect the business; reliance on existing customers for renewals and increased usage means NRR may decline or fluctuate; inadequate support or incorrect product implementation by customers could harm reputation and business; and contractual indemnification clauses may expose the company to significant liabilities - Failure to attract new customers or expand the pipeline and sales channels will adversely affect the company's business, financial condition, and operating results[283] - The company's business depends on existing customers renewing subscriptions and usage commitments, purchasing additional subscriptions and usage commitments, and expanding their product usage, but the Dollar-Based Net Retention Rate may decline or fluctuate due to various factors[285] - Failure to provide high-quality support or incorrect implementation or use of products by customers could lead to customer dissatisfaction, reputational damage, and negatively impact the business, operations, financial performance, and growth prospects[286][287] - Contractual indemnification clauses could expose the company to significant liabilities for intellectual property infringement, data protection, and other losses, and insurance may not be sufficient to cover all claims[288] - Failure to meet service level commitments in customer agreements could lead to contract terminations, reduced renewals, and reputational damage, thereby decreasing revenue and harming the business[289] Risks Related to Our Intellectual Property The company's use of third-party open-source software (e.g., Apache Kafka, Flink, Iceberg) may limit sales or lead to litigation; failure to acquire, maintain, protect, or enforce its intellectual property and proprietary rights could harm its ability to protect proprietary technology and brand; and the company may become involved in costly intellectual property disputes that disrupt business - The company's use of third-party open-source software, such as Apache Kafka, Apache Flink, and Apache Iceberg, in its products could lead to claims of infringement or non-compliance with license terms, affecting product sales or resulting in litigation[290][291] - As the company's products are derived from open-source software like Apache Kafka, it cannot claim exclusive rights or control its evolution, and competitors may develop similar or superior products[293] - Failure to acquire, maintain, protect, or enforce intellectual property and proprietary rights could harm the company's ability to protect proprietary technology and brand, and allow competitors to replicate products[294][295][296][297][298] - The company may become involved in intellectual property disputes, leading to costly legal fees, settlements, product redesigns, or cessation of sales, thereby harming its business and operating results[299][300][301][302] Risks Related to Our Dependence on Third Parties The company heavily relies on third-party cloud infrastructure providers (AWS, Azure, GCP) to host Confluent Cloud, where any disruptions, capacity limitations, or feature restrictions could adversely affect the business; failure to build and maintain successful partnerships for product distribution and sales opportunities, and reliance on third-party SaaS technology, could also harm business and operating results - The company outsources all infrastructure for Confluent Cloud to AWS, Azure, and GCP, and any disruptions, capacity limitations, or restrictions on feature usage could adversely affect the business[303][304] - Failure to establish and maintain successful relationships with partners to distribute products and generate sales opportunities could harm the company's business, operating results, and financial condition[306] - The company relies on third-party SaaS technology to operate critical business functions, and any disruptions or performance issues could adversely affect its business and operating results[307] Risks Related to Our Employees and Culture The company's success depends on highly skilled personnel, including senior management and technical professionals; failure to retain or motivate key personnel, or to recruit, retain, and motivate qualified personnel, will harm the business; additionally, maintaining company culture values is crucial, and inability to do so during growth could lead to employee attrition and business harm - The company's success depends on the efforts and talents of its senior management team and key employees (R&D, sales, and marketing)[308][309] - Failure to attract and retain highly qualified personnel, particularly cloud infrastructure product engineers and experienced sales professionals, will harm the company's business and future growth prospects[310] - The company's culture values are critical to its success, and inability t