Confluent will help IBM grow faster -- but can it grow fast enough to justify a high stock price?IBM (IBM +0.67%) is buying Confluent (CFLT +29.30%) -- that's the big tech headline this morning -- and it's driving shares of the data streaming platform 29.2% higher through 11:50 a.m. ET Monday.IBM stock is also up, but only 1.5%. Details, pleaseIn a press release this morning, IBM announced the deal as a signed, definitive agreement to acquire all outstanding stock of Confluent for $31 cash. As the company ...

Financial Data and Key Metrics Changes - Q3 subscription revenue grew 19% to $286.3 million, with Confluent Cloud revenue increasing 24% to $161 million, representing 56% of subscription revenue compared to 54% in the previous year [20][21] - Non-GAAP operating margin expanded 3 percentage points to approximately 10%, with subscription gross margin at 81.8% [4][21] - Adjusted free cash flow margin increased 450 basis points to 8.2%, and net income per share was $0.13 [21][22] Business Line Data and Key Metrics Changes - Confluent Platform revenue grew 14% to $125.4 million, driven by strong demand in financial services [20] - Flink ARR for Confluent Cloud grew more than 70% sequentially, with over 1,000 customers using Flink [7][26] - The $100K+ ARR customer count increased to 1,487, marking the largest sequential increase in two years [22] Market Data and Key Metrics Changes - Revenue from the U.S. grew 13% to $172.1 million, while revenue from outside the U.S. grew 29% to $126.4 million [21] - The company reported a net retention rate (NRR) of 114% and a gross retention rate (GRR) close to 90% [22] Company Strategy and Development Direction - The company is focusing on tightening field alignment to drive more use cases into production and expanding its Data Streaming Platform (DSP) specialist team for multi-product selling [5][7] - Confluent aims to position its Data Streaming Platform as the context layer for enterprise AI, facilitating real-time data processing and decision-making [17][19] - The company is also enhancing its partner ecosystem, with partners sourcing over 25% of new business in the last 12 months [9][28] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong consumption growth and the traction of the Data Streaming Platform, particularly with Flink [18][29] - The outlook for Q4 2025 includes expected subscription revenue in the range of $295.5 to $296.5 million, representing growth of approximately 18% [23] - For fiscal year 2025, subscription revenue is expected to be in the range of $1.1135 to $1.1145 billion, representing growth of approximately 21% [24] Other Important Information - The company highlighted the successful integration and growth of WarpStream, which has seen 8x growth in consumption since its acquisition [12][29] - Confluent was named a MongoDB Partner of the Year and served as an AWS Launch Partner for the new AI Agents and Tools category [10] Q&A Session Summary Question: What are the learnings from the go-to-market changes and conversion trends? - Management noted high confidence in the late-stage pipeline, emphasizing that these are customer workloads reaching production, which will drive future consumption [32] Question: Why should RPO be considered a reliable leading indicator? - RPO is viewed as a key leading indicator for Confluent Platform, while for Confluent Cloud, the focus is on the momentum of new use cases moving into production [34][36] Question: When can growth be expected to bottom? - Management expressed optimism about the cloud business's strength and noted stability in overall growth rates, despite some customer-specific impacts [40] Question: Is there a cannibalization effect from new offerings? - Management indicated that new offerings have proven to be a substantial tailwind, leading to larger deal sizes and increased customer engagement [42] Question: What is the early response to the launch of streaming agents on Confluent Cloud? - Management believes streaming agents can become a significant part of the mix, facilitating real-time data access for AI applications [50][52] Question: How significant is the cloud service provider replacement opportunity? - Management highlighted that the total cost of ownership (TCO) improvements and enhanced Data Streaming Platform capabilities are driving customer interest in migrating from existing solutions [78] Question: How are optimization levels impacting guidance? - Management described current optimization levels as healthy and normalized compared to historical trends, indicating a balanced approach to managing customer growth [84]

Financial Data and Key Metrics Changes - Q3 subscription revenue grew 19% to $286.3 million, representing 96% of total revenue [19][20] - Confluent Cloud revenue increased 24% to $161 million, accounting for 56% of subscription revenue compared to 54% in the previous year [19][20] - Non-GAAP operating margin expanded 3 percentage points to approximately 10% [3] - Subscription gross margin was 81.8%, exceeding the long-term target of 80% [20] - Operating margin increased 340 basis points to a record of 9.7% [20] - Adjusted free cash flow margin rose 450 basis points to 8.2% [20] Business Line Data and Key Metrics Changes - Confluent Platform revenue grew 14% to $125.4 million, driven by demand in financial services [19] - Flink ARR for Confluent Cloud grew more than 70% sequentially, with over 1,000 customers using Flink [25][26] - The number of $100K+ ARR customers increased to 1,487, marking the largest sequential increase in two years [21] - The $1 million+ ARR customer count rose to 234, representing a 27% growth acceleration [21] Market Data and Key Metrics Changes - Revenue from the U.S. grew 13% to $172.1 million, while revenue from outside the U.S. grew 29% to $126.4 million [20] - RPO (Remaining Performance Obligations) grew 43%, indicating strong future revenue visibility [24] Company Strategy and Development Direction - The company is focusing on tightening field alignment to drive more use cases into production, with over 40% sequential growth in late-stage pipeline [4][24] - There is a strong emphasis on expanding the Data Streaming Platform (DSP) and multi-product selling, particularly with Flink [5][26] - The partner ecosystem is contributing significantly, with over 25% of new business sourced from partners [8][26] - The company aims to position its Data Streaming Platform as the context layer for enterprise AI, facilitating the transition from AI experimentation to production [16][27] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the strong cloud consumption growth and the traction of the Data Streaming Platform, particularly with Flink [17][27] - The outlook for Q4 2025 includes expected subscription revenue in the range of $295.5 to $296.5 million, representing approximately 18% growth [22] - For fiscal year 2025, subscription revenue is expected to be between $1.1135 to $1.1145 billion, indicating approximately 21% growth [23] Other Important Information - The company ended Q3 with $1.99 billion in cash, cash equivalents, and marketable securities, reflecting a strong balance sheet [20] - The WarpStream acquisition has seen 8x growth in consumption since its acquisition [11][26] Q&A Session Summary Question: Insights on go-to-market changes and pipeline conversion trends - Management highlighted the effectiveness of the specialization model for DSP and the high confidence in the late-stage pipeline, which is expected to drive future consumption [29][30] Question: RPO and CRPO as leading indicators - RPO is considered a key leading indicator for Confluent Platform, while for Confluent Cloud, the focus is on the momentum of new use cases moving into production [31][32] Question: Growth stabilization and cloud business outlook - Management noted that the cloud business has shown stability, with positive trends in new use cases and product adoption [34] Question: Impact of new offerings on core streaming business - New offerings have proven to be a substantial tailwind, leading to larger deal sizes and increased customer engagement [37] Question: Flink's growth and future potential - Flink has seen significant adoption, with over 1,000 paying customers, and management is optimistic about its future growth potential [56] Question: AI use cases and customer readiness - Management indicated that AI use cases are broad, with many enterprises actively pursuing projects across various sectors [61]