Confluent(CFLT) - 2022 Q4 - Annual Report

Part I Business 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] - The company offers Confluent Platform (self-managed software) and Confluent Cloud (fully-managed SaaS) on major cloud providers [36][47] - 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][45] - International revenue constituted 38% of total revenue for the year ended December 31, 2022, serving customers in over 100 countries [46] - As of December 31, 2022, Confluent employed 2,761 people across 22 countries, with 62% in the United States [77] Risk Factors 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] - Macroeconomic uncertainties, such as inflation and potential recession, have extended sales cycles and increased IT spending scrutiny, potentially impacting future results [102] - 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][107] - Key competition arises from internal IT teams utilizing open-source software and major public cloud providers like AWS, Microsoft Azure, and Google Cloud [112][113] - 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] - The dual-class stock structure concentrates approximately 87.1% of voting power with Class B common stockholders as of December 31, 2022 [258] Unresolved Staff Comments The company has no unresolved staff comments from the Securities and Exchange Commission - None [290] Properties 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] Legal Proceedings 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] Mine Safety Disclosures This section is not applicable to the company's operations - None [293] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - The company has never declared or paid cash dividends, intending to retain all funds for future business growth [298] - The Initial Public Offering (IPO) on June 28, 2021, generated aggregate gross proceeds of $828.0 million [300] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 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 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] - In December 2021, the company issued $1.1 billion in 0% convertible senior notes due 2027, yielding net proceeds of $1.08 billion [363] 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 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][385] - Foreign currency risk primarily stems from non-U.S. operating expenses, with a hedging program initiated in December 2022 to mitigate this exposure [386][387] Financial Statements and Supplementary Data 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 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] - A Critical Audit Matter was identified regarding management's judgment in determining the Standalone Selling Price (SSP) for performance obligations [402][403] Consolidated Financial Statements 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 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] - 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] Controls and Procedures 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] - 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] Part III Directors, Executive Officers, Compensation, and Governance 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][589][590] Part IV Exhibits and Financial Statement Schedules 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] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None [598]