Confluent(CFLT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) Confluent's unaudited financial statements as of June 30, 2023, show $2.33 billion total assets, a $256.0 million net loss, and $106.8 million net cash used in operations for the six months ended Condensed Consolidated Balance Sheet Data (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $2,139,658 | $2,198,125 | | Total assets | $2,327,640 | $2,344,849 | | Total current liabilities | $423,358 | $424,330 | | Total liabilities | $1,566,254 | $1,575,372 | | Total stockholders' equity | $761,386 | $769,477 | Condensed Consolidated Statements of Operations Data (in thousands, except per share data) | Metric | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Total revenue | $363,587 | $265,546 | | Gross profit | $247,523 | $170,260 | | Operating loss | $(285,461) | $(228,789) | | Net loss | $(255,980) | $(230,618) | | Net loss per share, basic and diluted | $(0.87) | $(0.84) | Condensed Consolidated Statements of Cash Flows Data (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(106,832) | $(88,503) | | Net cash used in investing activities | $(81,424) | $(803,539) | | Net cash provided by financing activities | $65,221 | $45,803 | - In January 2023, the company acquired Immerok GmbH for $54.9 million in cash, resulting in $43.5 million of goodwill and a $2.6 million developed technology intangible asset[98][125] - The company recorded restructuring charges of $34.3 million for the six months ended June 30, 2023, primarily related to an 8% workforce reduction and lease abandonment charges[204][135] Management's Discussion and Analysis of Financial Condition and Results of Operations Confluent's revenue grew 37% to $363.6 million for the six months ended June 30, 2023, driven by Confluent Cloud, while focusing on efficiency and maintaining strong customer metrics despite net losses Revenue Performance (Six Months Ended June 30) | Metric | 2023 (in thousands) | 2022 (in thousands) | YoY Growth | | :--- | :--- | :--- | :--- | | Subscription Revenue | $337,055 | $240,938 | 40% | | Services Revenue | $26,532 | $24,608 | 8% | | Total Revenue | $363,587 | $265,546 | 37% | - Confluent Cloud's contribution to total revenue increased to 43% for the six months ended June 30, 2023, up from 32% in the same period of 2022, highlighting the strategic shift towards its fully-managed SaaS offering[217] Key Business Metrics Comparison (as of June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Total Customers | ~4,830 | ~4,120 | | Customers with >$100k ARR | 1,144 | 862 | | Remaining Performance Obligations (RPO) | $791.4M | $591.3M | | Dollar-Based Net Retention Rate (NRR) | >130% | Not specified, but over 130% in 2023 | - In response to macroeconomic uncertainty, Confluent implemented a restructuring plan in January 2023, which included an 8% workforce reduction, to adjust its cost structure and improve operating efficiency[187][204] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate fluctuations affecting its $1.85 billion in cash and foreign currency risk from operating expenses, partially mitigated by a hedging program - As of June 30, 2023, the company held $1.85 billion in cash, cash equivalents, and marketable securities, which are subject to interest rate risk[496] - The company is exposed to foreign currency risk as a portion of its operating expenses are denominated in foreign currencies. To mitigate this, a hedging program was initiated in December 2022[335][316] - The fair value of the company's $1.1 billion convertible senior notes is subject to market risk, primarily linked to the price of its Class A common stock, but this does not impact the financial statements as the notes are carried at face value less unamortized costs[334] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal controls, acknowledging inherent limitations of any control system - Management, including the CEO and CFO, concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective at the reasonable assurance level[318] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[319] - The company acknowledges that due to inherent limitations, no control system can provide absolute assurance or prevent all errors and fraud[1] PART II. Other Information Legal Proceedings Confluent is not currently involved in any legal proceedings that would materially and adversely affect its business, financial condition, or operations - Confluent is not presently a party to any legal proceedings that would materially and adversely affect its business, results of operations, financial condition, or cash flows[3] Risk Factors Confluent faces significant risks including a history of operating losses, dependence on its data-in-motion offering, intense competition, dual-class stock structure, and cybersecurity threats - The company has a history of operating losses and may not achieve or sustain profitability, having incurred a net loss of $256.0 million for the six months ended June 30, 2023[7][26] - Substantially all revenue is derived from the data-in-motion offering. Failure of this offering to satisfy customer demand or compete with alternatives would harm the business[9][341] - The company faces intense competition from internal IT teams using open-source software, major public cloud providers (AWS, Azure, GCP) who are also partners, and other legacy vendors[29][359][348] - The dual-class stock structure concentrates approximately 81.1% of voting power with pre-IPO stockholders (as of June 30, 2023), limiting the influence of Class A stockholders on corporate matters[17][632] - The business is exposed to significant cybersecurity risks, including data breaches. A past incident involving a third-party vendor (Codecov) resulted in unauthorized access to source code[14][403][407] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities and no material change in the planned use of proceeds from its Initial Public Offering - There were no unregistered sales of equity securities during the reporting period[686] - There has been no material change in the planned use of proceeds from the company's IPO, which was declared effective on June 23, 2021[535] Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period covered by this report - The company reports "None" regarding any defaults upon senior securities[687] Mine Safety Disclosures Mine safety disclosures are not applicable to the company's operations - Mine safety disclosures are not applicable to Confluent[536] Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended June 30, 2023 - During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement"[673] Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including corporate governance documents and Sarbanes-Oxley Act certifications - The report includes certifications from the Principal Executive Officer and Principal Financial Officer pursuant to Sarbanes-Oxley Act Sections 302 and 906[691][692] - Exhibits filed include corporate governance documents and interactive data files (Inline XBRL)[691] Signatures Signatures The Quarterly Report on Form 10-Q was signed on August 2, 2023, by Confluent, Inc.'s Principal Executive, Financial, and Accounting Officers - The report is signed by the company's Principal Executive Officer (Edward Jay Kreps), Principal Financial Officer (Steffan Tomlinson), and Principal Accounting Officer (Ying Christina Liu)[694] - The report was signed on August 2, 2023[541]