Q1 2024 Earnings Summary
- Confluent's consumption transformation is showing early signs of success, leading to the highest customer additions in five quarters and positive momentum carrying into Q2. This has allowed the company to increase its full-year revenue growth guidance from 22% to 23%, and derisk the second half of the year.
- The Confluent Cloud revenue grew 45% year-over-year in Q1, driven by both stabilization in consumption and the ramp-up of new customers, including those in the generative AI space. These positive trends have continued into Q2, indicating strong ongoing performance in the cloud segment.
- The company's Data Streaming Platform (DSP) products, including Connect, Process, and Govern, are growing rapidly, accounting for approximately 10% of cloud revenue with a substantially faster growth rate than the overall cloud business. Multiproduct customers increased by 47% year-over-year and have a net retention rate (NRR) substantially higher than the company average, highlighting the potential for significant future growth.
- Delayed Revenue Contribution from New Products: Key new product offerings like Flink are not expected to contribute materially to revenue until 2025, indicating that significant revenue growth from these innovations is still a year away. Rohan stated, "2024 is all about adoption and 2025 is all monetization."
- Reduced Visibility into Future Revenue Streams: The shift to a consumption-based model reduces reliance on traditional metrics like RPO and CRPO, potentially decreasing visibility into future revenue streams and making it harder to predict long-term performance. Rohan mentioned, "RPO is nothing but the commitment from the customer. And that's not a huge focus for us because our lives, Confluent Cloud next unit of consumption."
- Strategic Initiatives in Early Stages: Several strategic initiatives, such as partnerships with system integrators and efforts to migrate open-source Kafka users, are still in early stages, suggesting potential delays before these initiatives contribute meaningfully to revenue growth. Rohan noted that the SI opportunity is "in early days" and "it's not something you're going to see next quarter or next month." Similarly, Jay mentioned they are "just ramping that up" regarding the migration accelerator tool, indicating prior missed opportunities in capturing this market.
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Updated Revenue Guidance
Q: How do go-to-market changes impact your fiscal guidance?
A: Early indicators from our consumption transformation are positive, with strong cloud performance in Q1 and continued momentum into Q2. We have increased our full-year revenue guidance from 22% to 23% growth. The strength in the first half has de-risked the second half of the year. -
Flink's Revenue Contribution
Q: When will Flink contribute materially to revenue?
A: Flink is a big opportunity for us. 2024 is about adoption, and 2025 is about monetization. Our guidance assumes material contribution from Flink starting in 2025. -
Gen AI Impact
Q: How will Gen AI projects impact revenue timing?
A: We're seeing customers adopt our platform for Gen AI use cases now. As these initiatives hit production, we expect an increasing revenue ramp heading into next year. Customers are using the full platform, including connectors, ksqlDB, Flink, and integration into LLMs. -
Pricing Changes Effect
Q: What pricing changes have you made and expected benefits?
A: We've implemented changes to reduce friction in the land and expand process. This includes new product offerings that allow better TCO and incentivize use of multi-tenant offerings. These changes aim to make our cloud offering a no-brainer choice and to capture more open-source Kafka usage. -
Multiproduct Adoption
Q: Is prioritizing consumption driving faster product adoption?
A: Yes, the consumption model incentivizes our field team to drive adoption of our platform beyond Kafka. Immediate compensation aligns with higher consumption, accelerating multi-product adoption. -
Platform Revenue Trends
Q: How should we view platform revenue trends?
A: Our Confluent Platform grew 15% year-over-year. License revenue recognition can be lumpy due to timing of large deals. We remain committed to supporting customers both on-prem and in the cloud. -
Data Governance Demand
Q: Is AI driving demand for data governance?
A: AI is one of the drivers increasing interest in data governance. Customers need accessible and compliant data for AI initiatives. We expect governance to become a sizable business over time. -
Financial Services Demand
Q: What are you seeing in financial services demand?
A: Financial services continues to be a strong segment. We've seen significant ramp-up in Confluent Cloud adoption, even among the largest financial institutions. -
Gross Margin Outlook
Q: Will scaling new products impact gross margins?
A: We expect to maintain gross margins in the mid-70% range, with no significant impact from scaling new products. -
Table Flow Adoption
Q: Expectations for Table Flow adoption upon GA?
A: We anticipate strong customer interest in Table Flow and Apache Iceberg. It's early, but we believe this has significant potential as it comes to market. -
Migration Accelerator Progress
Q: Any progress with the migration accelerator tool?
A: We're ramping up efforts to move customers from open-source Kafka. By reducing migration effort, we aim to accelerate transitions and increase wallet share among Fortune 500 companies.