Confluent(US:CFLT)2023-05-02 16:00PART I ITEM 1. FINANCIAL STATEMENTS (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 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 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 goodwill77123 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 charges170 - 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 months114 Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) 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 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 growth157 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 offering611 Results of Operations 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 expenses244211608 Liquidity and Capital Resources 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 million216 - 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 charges217 - 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 securities638 ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 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 notes253674 - 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 impact643254 ITEM 4. Controls and Procedures 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 level225 - There were no material changes to the company's internal control over financial reporting during the quarter256 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings 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 company647 ITEM 1A. Risk Factors 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 future267708 - 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 services693 - Cybersecurity incidents pose a significant risk, highlighted by the 2021 Codecov breach where attackers gained unauthorized access and copied private source code repositories565 - 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 matters480460 - 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 products261420 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 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 IPO542 ITEM 5. Other Information 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 proposals545560 ITEM 6. Exhibits 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 files527562