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Confluent, Inc. (CFLT)·Q3 2024 Earnings Summary

Executive Summary

  • Q3 revenue was $250.2M (+25% YoY), subscription revenue $239.9M (+27% YoY), and non-GAAP EPS $0.10; total gross margin reached 79% and subscription gross margin 82.2%, both record levels .
  • Confluent Cloud revenue grew 42% YoY to $129.8M and now represents 54% of subscription revenue; Platform revenue was $110.1M (46%) with strength in financial services .
  • Management raised FY24 guidance: subscription revenue to $916.5–$917.5M, non-GAAP operating margin to ~2%, non-GAAP EPS to $0.25, and FCF margin to 0–1% .
  • Digital native consumption stabilized and DSP adoption broadened, but NRR dipped to 117% and Q4 sequential growth guide is below typical seasonal patterns; Q3 included a one-time low 7-figure cloud revenue benefit from unused credits .
  • Strategic catalysts: expanded AI use cases (OpenAI), Flink ramp with new developer/security features, and WarpStream BYOC acquisition adding a third deployment option .

What Went Well and What Went Wrong

What Went Well

  • “We have scaled to surpass $1 billion in total revenue run rate with over $250 million in Q3 total revenue” and exceeded all guided metrics for Q3, underscoring durable growth momentum .
  • Record margins: subscription gross margin 82.2% and total gross margin ~79% drove non-GAAP operating margin to 6.3% and FCF margin to 3.7% (third positive quarter for both) .
  • AI and DSP traction: OpenAI expanded usage; 19 of top 20 cloud customers adopted at least one DSP product and 13 adopted across all three categories, supporting multiproduct upsell and higher NRR in that cohort .

What Went Wrong

  • NRR ticked down to 117% (from 118% in Q2) reflecting lingering consumption volatility, despite GRR >90%; stabilization expected around current levels into Q4 .
  • Q4 guide implies lower-than-usual sequential subscription growth due to lumpiness in Platform deals and the Q3 one-time benefit, prompting prudence despite positive momentum .
  • Federal demand was “reasonable” but not a standout, with cloud still pending FedRAMP opening, limiting upside in the vertical near term .

Financial Results

Core P&L and Cash Metrics (Quarterly)

MetricQ1 2024Q2 2024Q3 2024
Total Revenue ($USD Millions)$217.237 $234.986 $250.199
Subscription Revenue ($USD Millions)$206.902 $224.702 $239.851
Confluent Cloud Revenue ($USD Millions)$106.8 $117.4 $129.8
Confluent Platform Revenue ($USD Millions)$100.1 $107.3 $110.1
GAAP Operating Margin (%)-51.3% -46.1% -37.4%
Non-GAAP Operating Margin (%)-1.5% 0.6% 6.3%
GAAP EPS ($)-0.30 -0.28 -0.23
Non-GAAP EPS ($)0.05 0.06 0.10
Total Gross Margin (GAAP, %)71.8% 72.3% 74.5%
Subscription Gross Margin (Non-GAAP, %)80.7% 80.8% 82.2%
Free Cash Flow ($USD Millions)-31.679 2.709 9.337
Free Cash Flow Margin (%)-14.6% 1.2% 3.7%

YoY Comparison (Q3 2024 vs Q3 2023)

MetricQ3 2023Q3 2024
Total Revenue ($USD Millions)$200.181 $250.199
Subscription Revenue ($USD Millions)$189.270 $239.851
GAAP Operating Margin (%)-54.3% -37.4%
Non-GAAP Operating Margin (%)-5.5% 6.3%
GAAP EPS ($)-0.30 -0.23
Non-GAAP EPS ($)0.02 0.10
Free Cash Flow ($USD Millions)-13.083 9.337
Free Cash Flow Margin (%)-6.5% 3.7%

Segment Mix

MetricQ1 2024Q2 2024Q3 2024
Confluent Cloud Revenue ($USD Millions)$106.8 $117.4 $129.8
Cloud as % of Subscription Revenue49% of total revenue (context) 52% of subscription 54% of subscription
Confluent Platform Revenue ($USD Millions)$100.1 $107.3 $110.1
Platform as % of Subscription Revenue—48% 46%

KPIs

KPIQ1 2024Q2 2024Q3 2024
Total Customers~5,120 ~5,440 ~5,680
Customers ≥$100k ARR1,260 1,306 1,346
Customers ≥$1M ARR168 177 184
Dollar-Based NRRIn line with 120–125% target 118% 117%
GRR>90% >90% >90%

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Subscription Revenue ($USD Millions)FY 2024~$910M $916.5–$917.5M Raised
Non-GAAP Operating Margin (%)FY 2024~0% ~2% Raised
Non-GAAP EPS ($)FY 2024$0.20 $0.25 Raised
Free Cash Flow Margin (%)FY 2024~0% (breakeven) 0–1% Raised
Subscription Revenue ($USD Millions)Q4 2024—$245–$246M New
Non-GAAP Operating Margin (%)Q4 2024—~2% New
Non-GAAP EPS ($)Q4 2024—$0.05 New
Subscription Revenue ($USD Millions)Q3 2024$233–$234M Actual: $239.9M Beat vs guide

Earnings Call Themes & Trends

TopicQ1 2024 (Prev-2)Q2 2024 (Prev-1)Q3 2024 (Current)Trend
AI initiativesGA of Flink; TableFlow early access; RAG architecture emphasis; OpenAI, GEP examples Continued partner traction; gen AI customer use cases; pricing changes aligned to consumption OpenAI expanded usage; hosted AI Day; AI accelerator with AWS/MongoDB; agentic/stream processing opportunity Strengthening adoption
Digital native consumptionStabilization starting; ramp from newer customers Volatility returned in June/July; optimization pressure Stabilization resumed; focus shifting to new use cases/DSP Stabilizing
DSP product adoption~10% of cloud revenue; fastest growing; multiproduct cohort NRR > company avg DSP outgrowing core; multiproduct NRR substantially >130% 19 of top 20 cloud customers adopted ≥1 DSP; 13 across all three Broadening
Flink executionGA announced; early interest (~600 trials) >1,000 trials; early revenue; platform offering added New Table API, private networking, VS Code extension; enterprise features Advancing features
Pricing/consumption modelLaunched consumption transformation Pricing tuned (CKUs); friction reduction; guide prudence Model drives lands and DSP attach; comp incentives highlighted Structural tailwind
Financial servicesStrong segment; cloud ramp underway Two 8-figure Platform deals; sector strength “Healthy demand” and strong Platform ARR at top banks Sustained strength
Regulatory/FederalFed a decent contributor; more impact pending cloud opening Hiring AEs; impact more 2025 “Reasonable,” not noteworthy; cloud pending FedRAMP Neutral

Management Commentary

  • CEO: “We have scaled to surpass $1 billion in total revenue run rate with over $250 million in Q3 total revenue. We also exceeded all guided metrics for Q3” .
  • CFO: “Subscription revenue grew 27% to $239.9 million… total gross margin reached a record high of 79%… operating margin expanded to a record high of 6.3%… We are raising full-year subscription revenue, non-GAAP operating margin, non-GAAP EPS and FCF margin” .
  • On one-time cloud benefit: “One of our existing customers… expanded into a new international market which did not materialize. We took some revenue at the end of the quarter as unused credits… Adjusted for this benefit, we still handily beat our consensus expectations” .
  • On BYOC/ WarpStream: “WarpStream’s bring your own cloud model… opens up opportunities… 5 to 10x cheaper than other alternative systems… Security by avoiding break glass access… the only company with a data streaming offering for everyone” .

Q&A Highlights

  • Digital natives: Stabilization after optimization; confidence in new use cases into year-end .
  • Flink adoption: Early enthusiasm across cloud and platform; private networking and Table API expanding use cases .
  • Guidance cadence: Q4 sequential growth below typical seasonality due to Platform lumpiness and Q3 one-time benefit; prudence remains .
  • Margins: Subscription gross margin at 82.2% seen as sustainable; DSP largely multi-tenant and not expected to be a margin headwind .
  • Federal: Reasonable but not standout; upside depends on cloud availability .

Estimates Context

  • S&P Global consensus data was unavailable at time of request due to an access limit; therefore, numeric consensus comparisons cannot be shown. Management stated that even after adjusting for the one-time cloud revenue benefit, Q3 results “still handily beat our consensus expectations” .

Key Takeaways for Investors

  • Margin inflection: Record total and subscription gross margins with non-GAAP operating margin at 6.3% and FCF margin at 3.7% signal operating leverage and disciplined execution .
  • Mix shift: Cloud at 54% of subscription and rising, with DSP adoption across large customers; expect monetization tailwinds in 2025 from Flink, Connect, and Governance .
  • Guidance upgrade: FY24 raised across subscription revenue, non-GAAP margin, EPS, and FCF margin; Q4 guide conservative given Platform deal timing and Q3 one-time benefit .
  • AI catalyst: Expanded OpenAI usage, AI Day, and accelerator program highlight Confluent’s role in real-time data for gen AI and agentic workloads; Flink enterprise features de-risk adoption .
  • Digital native cohort: Consumption stabilization and new use case adoption suggest NRR steadiness near current levels; watch cohort momentum into Q4 .
  • BYOC expansion: WarpStream adds a third deployment option (BYOC) to access high-scale workloads and ease migration from open source Kafka; expected growth driver over time .
  • Trading setup: Near-term focus on Q4 seasonality vs conservative guide and DSP attach momentum; medium-term thesis centers on multiproduct monetization, cloud mix, and sustained margin expansion .