Q3 2024 Earnings Summary
- Stabilization and improved growth in the digital native customer segment, with better growth this quarter and confidence going forward. This indicates that the segment has "done the bulk of what they need to do in terms of larger changes in their environment" and provides a "good trajectory going forward".
- High and increasing win rates against competitors, with win rates well above 90% against start-up competition, demonstrating strong market competitiveness ,. This reflects very strong win rates overall and confirms the company's ability to retain and attract customers even when renewals are excluded ,.
- Significant product innovation and adoption of Data Streaming Platform (DSP) products, with DSP products expected to drive growth and monetization in 2025, alongside opportunities in generative AI ,. The company has had the "highest number of product innovations in the history of the company" and is seeing "good adoption with respect to our DSP products" , which are "in their earlier stages of their S curves" , indicating substantial future growth potential.
- Q4 guidance implies lower sequential growth than in prior years, potentially indicating a slowdown in revenue growth momentum. For instance, total subscription revenue is expected to grow 2.4% sequentially in Q4, compared to 12% in the same period last year. This lower growth rate may be due to lumpiness in the Confluent Platform business and a lack of repeat onetime revenue benefits in Q4. Management acknowledges these factors and emphasizes prudence in their outlook.
- Net Revenue Retention (NRR) decreased slightly from 118% to 117%, suggesting a potential slowdown in expansion within the existing customer base. While management attributes this to marginal factors and expresses confidence in stabilizing NRR at current levels, the slight decline may indicate challenges in driving incremental growth from existing customers.
- The company's growth in AI-related use cases may take time to materialize into significant revenue, as customers adopt at different paces, and the impact may not be immediate. Management acknowledges that while there is excitement around Gen AI, the revenue impact is expected to be gradual, and not an immediate boost to the infrastructure layer. This delay could temper near-term growth expectations related to AI initiatives.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Subscription Revenue | Q4 2024 | no prior guidance | $245M to $246M (~21%) | no prior guidance |
Non-GAAP Operating Margin | Q4 2024 | no prior guidance | 2% | no prior guidance |
Non-GAAP Net Income per Diluted Share | Q4 2024 | no prior guidance | $0.05 | no prior guidance |
Subscription Revenue | FY 2024 | $910M (~25%) | $916.5M to $917.5M (~26%) | raised |
Non-GAAP Operating Margin | FY 2024 | break even | 2% | raised |
Non-GAAP Net Income per Diluted Share | FY 2024 | $0.20 | $0.25 | raised |
Free Cash Flow Margin | FY 2024 | break even | 0% to 1% | raised |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Digital native customers | • Q1: Noted stabilization in consumption with AI focus • Q2: Volatile consumption due to cost optimization | • Q3: Reported stabilization with renewed use-case focus, particularly among larger cloud customers | Sentiment improved as cost-optimization phase seems largely complete |
Net Revenue Retention (NRR) | • Q1: Healthy, aligned with 120–125% goal • Q2: Declined to 118% due to large digital natives optimizing consumption | • Q3: Slight decrease to 117% but viewed as stable, supported by DSP adoption | Stable but slightly below midterm target |
Data Streaming Platform (DSP) | • Q1: Products (Connect, Process, Govern) at ~10% of cloud revenue, higher growth than core • Q2: Fastest-growing segment with high NRR, fueling Gen AI | • Q3: Adoption growing faster than cloud overall, multiproduct users show higher NRR, not yet fully monetized | Accelerating adoption with early but strong multiproduct uptake |
Consumption transformation | • Q1: Shift from commitments to consumption, driving new logo growth • Q2: Transition largely complete, focusing on long-term expansion | • Q3: Emphasis on high-quality customer lands (e.g., Confluent 2000), stable consumption trends among digital natives | Continued progress with improved stability |
Product innovation | • Q1: 15+ new features (e.g., Table Flow), early-stage demand for Flink • Q2: Emphasized new product tailwinds (Gen AI, DSP improvements) | • Q3: Most aggressive innovation phase in company history, WarpStream acquisition, growing DSP adoption | Strong focus on expanding platform capabilities |
Generative AI | • Q1: Early traction with AI-driven use cases (e.g., GEP Worldwide) • Q2: Emphasized real-time data fueling AI (e.g., mortgage lender, e-commerce applications) | • Q3: Further adoption across multiple industries, AI Day event, accelerator program, OpenAI expansion | Growing momentum as AI use cases expand and drive Confluent adoption |
Flink | • Q1: GA launch, 600+ trials, monetization planned for 2025 • Q2: Early adopter base growing, still behind Kafka in maturity | • Q3: Limited availability nearing GA, strong enthusiasm, used for real-time analytics and AI | Scaling adoption with increasing production use cases |
Win rates vs. competition | • Q1: No direct mentions • Q2: No direct mentions | • Q3: Win rates above 90% against start-up competition | Newly mentioned; strongly positive |
Revenue growth and guidance | • Q1: 25% total revenue growth, raised guidance to 23% for FY 2024 • Q2: Subscription revenue +27%, Cloud +40%, cautious outlook due to consumption volatility | • Q3: Total revenue +25% (to $250M), Cloud +42%, reaffirmed stable outlook; FY subscription guidance at ~$917M | Continued growth with stable guidance |
Delayed revenue/monetization timeline for new products | • Q1: Flink monetization expected in 2025, table features still in early access • Q2: Early-stage new products to become meaningful in 2025 | • Q3: DSP monetization still nascent, expected to ramp in 2025 | Consistent delay in near-term revenue impact |
Partnerships with system integrators | • Q1: Early mentions of “Accelerate with Confluent,” future revenue driver • Q2: Expanded SI programs (Build/Accelerate with Confluent), AI-focused solutions | • Q3: No mention | No updates in Q3 |
Migration from open-source Kafka | • Q1: Introduced migration tools, targeting open-source users (e.g., GEP Worldwide) • Q2: Reducing friction with multiple cloud SKUs, hopes to capture more OSS adoption | • Q3: Highlighted WarpStream for incremental migration from OSS Kafka, targeting large digital natives | Expanding push to convert OSS users with new migration offerings |
-
Digital Native Customers Stabilization
Q: Are digital native customers showing more confidence and growth?
A: Yes, digital native customers have stabilized, with better growth this quarter as they've completed most optimizations and are adopting new use cases. This improvement puts us on a good trajectory moving forward. -
Early AI Demand Impact
Q: How is early AI demand affecting customer conversations?
A: We're seeing growth from AI providers like OpenAI and new enterprise use cases that deliver data to AI applications. While adoption varies across customers, there's a real and positive trend towards increased investment in data infrastructure driven by AI. -
Go-to-Market Strategy Success
Q: Can you discuss changes in your go-to-market process and customer consumption?
A: By broadening our reach into the 150,000 open-source Kafka users and targeting the Confluent 2000 high-potential accounts, we've landed more customers faster. This has led to increased adoption and expansion into production use, setting a positive trajectory into next year. -
Net Revenue Retention (NRR) and Cloud Growth
Q: Why did NRR downtick slightly despite cloud acceleration?
A: The NRR decline from 118% to 117% was marginal. We saw stabilization in consumption among digital native customers and larger cloud customers adopting new use cases and DSP, giving us confidence in NRR stability at current levels. -
Q4 Guidance and Growth Expectations
Q: Why is Q4 revenue growth lower than seasonal patterns?
A: The Confluent Platform business is lumpy due to 20% upfront revenue recognition and timing of large deals. Additionally, a one-time revenue benefit in Q3 makes for a tough comparison. Adjusting for these factors, our growth aligns with historical trends. -
WarpStream Opportunity
Q: Is WarpStream unlocking larger opportunities, especially for open-source Kafka migrations?
A: Yes, WarpStream appeals to large open-source Kafka users by offering cost savings and a smoother path to managed services. It enables us to engage significant accounts that have been hard to convert, helping us bring them into the fold. -
Margin Outlook with New Products
Q: How will new products affect margins and growth efficiency?
A: We continue to focus on efficient growth through ROI-based decisions. Investments in new products and sales training are already underway. As DSP contributes more to revenue, we expect to maintain margins without significant negative impact. -
One-Time Revenue Benefit
Q: What was the one-time revenue benefit in cloud?
A: An existing customer didn't expand into a new international market as planned, so we recognized unused credits as revenue at quarter-end. Despite this, we exceeded expectations even without the one-time benefit. -
Federal Business Trends
Q: How did the federal business perform amid spending pressures?
A: The federal business was reasonable but not noteworthy. Limited to Confluent Platform, it remains a decent portion of our business. We anticipate greater impact when Confluent Cloud becomes available in this sector.