Confluent, Inc.

Welcome to the Confluent Q1 2025 Earnings Conference Call. I'm Shane Zee from Investor Relations, and I'm joined by Jake Krebs, co-founder and CEO, and Rohan Sivaram, CFO. During today's call, management will make forward-looking statements regarding our business, operations, market and product positioning, growth strategies, financial performance, and future prospects, including statements regarding our financial guidance for the fiscal second quarter of 2025 and fiscal year 2025. These volume statements are subject to risks and uncertainties, which could cause actual results to differ materially from those anticipated by these statements. Further information on risk factors that could cause actual results to differ is included in our most recent Form 10-K file with the SEC. We assume no obligation to update these statements after today's call except as required by law. Unless stated otherwise, certain financial measures used on today's call are expressed on a non-GAAP basis, and all comparisons are made on a year-over-year basis. We use these non-GAAP financial measures internally to facilitate analysis of financial and business trends and for internal planning and forecasting purposes. These non-GAAP financial measures have limitations and should not be considered in isolation from or as a substitute for financial information prepared in accordance with GAAP. A reconciliation between these GAAP and non-GAAP financial measures is included in our earnings press release and supplemental financials, which can be found on our website at investors.confluent.io. References to profitability on today's call refer to non-GAAP operating margin unless stated otherwise. And with that, I'll hand the call over to Jay.

Thanks, Shane. Good afternoon, everyone. Welcome to our first quarter earnings call. We're pleased to start the year with solid momentum. Q1 subscription revenue grew 26% to $261 million. Confluent Cloud revenue grew 34% to $143 million. And non-gap operating margin improved 6 percentage points to 4%. Our Q1 results demonstrate the mission-critical nature of data streaming and our significant product leadership. We remain laser-focused on enabling our customers to cost-efficiently build next-generation applications and win in the age of AI. On today's call, I'd like to walk through four key strategic drivers behind our resilience in the current environment. In fact, our resilience has been tested by multiple macro headwinds since Confluence founding over 10 years ago, and it continues to support our path towards delivering long-term growth and profitability. First and most critically, data streaming sits at the heart of the mission-critical use cases that our customers rely on every day. These are not lightweight experiments. They're the backbone of real production workloads. These applications play a critical role in the day-to-day business of our customers and can't be turned off without major disruption to core parts of their business. Confluent powers real-time fraud detection for financial institutions, inventory management for retailers, 5G networks for telcos, and data pipelines that power businesses in countless industries. This dynamic has helped sustain gross retention rate above 90% despite multiple points of instability in the macro environment that reduced IT spend for some of our customers. The second driver of our resilience is the scale of the opportunity we're going after. Apache Kafka has become a foundational technology for data management. Today, it's used by more than 150,000 organizations, representing $100 billion plus addressable market opportunity. Soaking up the countless use cases built on Kafka has been a core engine of our growth and continues to be a powerful tailwind. This quarter, we added 340 new customers, our highest net add in three years, and we continue to see robust growth with many of our largest customers as they expand to new use cases. In Q1, we added 16 new customers to our cohort of million-dollar-plus ARR customers, our highest addition to that cohort ever. Our customer base is diversified by industry and by geography, and no single customer accounts for more than 2% of our total ARR. This diversification further strengthens the resilience and durability of our business. Odyssey and Booking.com are two great examples of customers that started with open source and then converted to Confluent. Odyssey is a leading audio entertainment company with 200 million listeners across radio broadcasts, podcasts, and other digital content. As their audience grew and customer expectations rose, their old infrastructure began to hold them back. Developers were spending most of their time wrestling with brittle point-to-point integrations built with open-source Kafka. These were difficult to manage and even harder to scale. Delivering new features at the pace the business needed became a major challenge. That's when Odyssey turned to Confluent. Our pre-built connectors allow them to easily integrate data streaming into their existing tools and systems. Stream governance enables them to quickly and easily enforce data consistency across dozens of different systems and applications. With our complete data streaming platform, Odyssey freed up developer resources so they can focus on innovation instead of managing infrastructure. As a result, Odyssey accelerated feature development by 40%, delivering more personalized experience that keep their customers listening. This helps unlock new digital revenue opportunities across their platform. Booking.com is one of the world's largest online travel agencies. Its mobile app is one of the most downloaded travel agency apps in the world. Booking.com developed an in-house data streaming platform based on open source Kafka. However, self-managing Kafka became increasingly burdensome as the company grew and introduced new use cases. Scaling clusters, handling updates, and monitoring pipelines consumed significant resources. To alleviate the operational complexities of managing Kafka, Booking.com migrated each business unit's open-source clusters to Confluent Platform. Our complete enterprise-grade solution provided enhanced reliability and out-of-the-box functionality. By spending less time managing infrastructure, Booking.com can now support various mission-critical use cases more efficiently. including marketing, payments, personalization, and core booking processes. With a complete data streaming platform that is connected across their business, they were also able to deploy a connected trip experience. This allows customers to seamlessly book flights, accommodations, car rentals, and experiences in one visit. The third driver of our resiliency is meeting customers wherever they are, whether that's on-prem, on the edge, in any cloud, or hybrid environment. That flexibility also provides another layer of resilience to our business. It means our growth strategy is less exposed to changes in cloud investment and provides a healthy mix of routable and consumption-based revenue streams. Just as importantly, it lets us land and expand in environments where cloud isn't an option, whether for regulatory reasons, company mandates, or just customer preference. We continue to see strong momentum in this area. Our Confluent platform business had a particularly strong quarter, with revenue growth accelerating to 18% year-over-year, representing its strongest Q1 growth in three years. And finally, it's not just that our products are better, faster, and more reliable, they're also more cost-effective. This is a strong differentiator and provides our customers with more value for less money across a wide range of use cases. Our low TCO enables us to expand usage within our existing customer base and also drive new conversions from open-source Kafka. It's one of the key levers that helps us retain customers, grow within our installed base, and tap into the broader open-source community in a meaningful way. Key to capitalizing on this TCO advantage is offering pricing and packaging that fits the full range of Kafka use cases from early projects to the most demanding production workloads. With new offerings like warp stream and freight clusters, we're now able to serve high throughput, low latency workloads at attractive price points, enabling our customers to tackle a wider range of use cases. We continue to see strong traction with both offerings in Q1, including new customers like Liftoff.io and the next wave of Gen AI companies like Cursor and Thinking Machines. Here's an example of how our TCO advantage drives sustained growth with a top 20 global bank. This 5 million plus ARR customer, who most recently increased their spend with us by over 30%, initially relied on open source Kafka. However, the complexity and rising costs of self-managing Kafka quickly outweighed the value they received. More than five years ago, they migrated their first use case to Confluent. Since then, we've become a strategic partner, as they've transitioned numerous legacy workloads to the cloud. Today, Confluent powers hundreds of use cases across their business, like fraud detection, capital management, regulatory reporting of trade data, and more. By moving to Confluent, they have significantly reduced operational costs, turned their real-time data into a competitive advantage, and lowered their TCO. In fact, the customer believes that for every dollar they spend with Confluent, they would otherwise spend $3 managing Kafka themselves. Together, these four factors, mission-critical use cases, open-source conversion opportunities, hybrid business model, and 2CO advantages have laid the foundation and made our business more resilient through multiple shifts in the macro environment. Additionally, we see continued adoption of our DSP components, which significantly outgrew our core cloud business. Confluent unifies everything organizations need to work with real-time data. The ability to stream, connect, process, and govern continuously flowing streams of data all in one platform. This foundation is proving especially valuable as generative AI moves from experimentation to execution. In particular, we're seeing strong interest and adoption for Flink and TableFlow, two of the most recent additions to our DSP. Our complete platform is becoming the connective tissue that brings real-time context to our customers' gen AI applications so they can deliver trustworthy and actionable results that work in everyday operations. It's very exciting to see what our DSP enables our customers to do. For example, a leading luxury goods conglomerate with 75 brands and over 6,000 stores worldwide uses our Confluent Cloud for Apache Flink to power its real-time order management and drive e-commerce growth. The company initially turned to Confluent Cloud to stream order management data to give internal teams accurate real-time visibility into product availability. As Confluent proved its value with this first use case, the customer consumed more of our platform, including our fully managed Flink service to prevent inaccurate stock information caused by duplicate data. This customer uses Flink to filter out orders and inventory duplicates and to continuously analyze real-time product availability. When high demand items come back in stock, Flink automatically triggers real-time alerts to notify waiting customers. enhancing the customer experience and driving incremental revenue. Building on the success of their initial Flink use case, they are now exploring new ways to leverage the technology to streamline and scale product inventory management. Before closing, I'm excited to share two updates. First, Ryan McBann has been promoted to Chief Revenue Officer at Confluent. In this expanded role, Ryan will lead the global field strategy, bringing together sales, sales engineering, customer success, and sales operations to help customers activate real-time data to build the next wave of intelligent applications. Ryan joined Confluent last year as Senior Vice President, Global Head of Sales. He brings over 20 years of sales leadership experience, building and leading top performing teams around the world. Before Confluent, Ryan was president of UiPath Americas, where he drove significant growth across their multi-product platform. He also held senior leadership roles at VMware and Cisco. Second, we're honored to be named a Google Partner of the Year for the sixth time. This recognition is a reflection of the strong partnership we have with the leading CSPs. Together, we enable organizations to deliver the next-generation applications they need to thrive in the age of AI. In closing, we're proud of our strong start to the year. Our commitment to providing the industry's most complete data streaming platform, paired with a highly resilient business, uniquely positions Confluent to seize the $100 billion-plus data streaming market. With that, I'll turn it over to Rohan.

Thanks, Jay. Good afternoon, everyone, and thanks for joining our earnings call. Our first quarter performance underscores the strength of our mission-critical data streaming platform, the strategic value of our multi-cloud, multi-data destination, and multi-deployment approach, as well as the flexibility of our well-diversified growth strategy. Turning to the results, Q1 subscription revenue grew 26% to $260.9 million, exceeding the high end of our guidance and representing 96% of total revenue. Confluent platform revenue reached a new record of 118.2 million, with growth accelerating to 18%. This momentum was driven by early traction in our partner ecosystem, where OEM showed particular strength internationally. Cloud revenue grew 34% to 142.7 million, representing 55% of subscription revenue. The revenue impact of lapping the leap year was approximately negative 1.6 million, as Q1 this year had one fewer day for consumption. Turning to the geographical mix of total revenue, revenue from the U.S. grew 23% to 156.4 million. Revenue growth from outside the U.S. grew 28% to 114.7 million. Moving on to rest of the income statement. I'll be referring to non-GAAP results unless stated otherwise. While driving top line growth at scale, we continue to show significant operating leverage in our model. In Q1, subscription gross margin increased 100 basis points to 81.7%, primarily driven by continued efficiency gain in Confluent Cloud, coupled with strength in Confluent Platform. Operating margin was 4.3%, exceeding our guidance of approximately 3%, and was primarily driven by revenue and gross margin outperformance. Adjusted free cash flow margin, which excluded the non-recurring impact of our compensation change in Q1, was 1.8%. The impact of the change to free cash flow margin in Q1 was approximately 14 percentage points. Net income per share was $0.08, using 367.8 million diluted weighted average shares outstanding. Fully diluted share count under the Treasury stock method was approximately 380.9 million. We ended the first quarter with $1.92 billion in cash, cash equivalents, and marketable securities. Turning now to customer metrics, we ended Q1 with approximately 6,140 customers, representing a sequential increase of 340 customers, our highest sequential increase since Q1 of 2022. This robust growth underscores the strong value proposition of our multi-product platform and our continued success in capturing the open source conversion opportunity. As mentioned at Investor Day 2025, we will report total customer count on an annual basis and begin reporting 20K plus ARR customers on a quarterly basis. In Q1, 20K plus ARR customer count increased to 2,487, up 41 customers sequentially, and represented more than 95% of our ARR. Our 100K plus ARR customer count increased to 1,412, up 31 customers sequentially, and accounted for greater than 90% of our ARR. Our $1 million plus ARR customer count grew to 210, up 16 customers sequentially. Our best quarter in net ad for this cohort. NRR for the quarter remained stable at 117%, while GRR continued to be greater than 90%, demonstrating the mission-critical nature of our data streaming platform for our customers. Turning to our outlook, for the fiscal second quarter of 2025, we expect subscription revenue to be in the range of 267 to 268 million, representing growth of approximately 19%. Non-gap operating margin to be approximately 5%. and non-GAAP net income per diluted share to be in the range of $0.08 to $0.09. For fiscal year 2025, we expect subscription revenue to be in the range of $1.1 billion to $1.11 billion, representing growth of approximately 19% to 20%, non-GAAP operating margin to be approximately 6%, and non-GAAP net income per diluted share to be approximately $0.36. Now I'd like to provide some additional context for our guidance along with a few modeling points. In light of the uncertainties in the current environment, we are widening our revenue guidance range and embedding a modest decline in growth rates from Q2 through Q4. For our cloud business, some of our larger customers began slowing the pace of new use case addition and focusing on cost optimization efforts in March. In contrast, consumption activities in our smaller customer base remain stable. These trends have continued into April. Given the current macro conditions, we believe it's prudent to assume there will not be a near-term rebound in consumption. This contrasts with previous cycles where we typically saw a subsequent expansion following a period of slower consumption. As a result, we now expect cloud subscription revenue mix to be approximately 58% for Q4 25 with a sequential mix increase of approximately one point each quarter. Finally, we expect FY25 adjusted free cash flow margin to be approximately 6%. This excludes, as previously discussed, a one-time headwind of 3-4 percentage points for the full year due to our compensation change in Q1. We are confident that our updated guidance coupled with multiple parts to growth sets us up for success this year. Specifically, we see four key drivers of growth in our business. First, the core streaming conversion opportunity targeting an open source install base of over 150,000 organizations. Second, our DSP upsell opportunities across Connect, Process, Govern, and TableFlow. Third, our highly strategic role in the age of AI. As traditional enterprises accelerate AI adoption, we believe this represents our largest monetization opportunity within AI. And fourth, the leverage we gain from our expanding partner ecosystem, including the OEMs, SIs, MSPs, and other high-impact strategic partnerships that help us extend our global reach and accelerate go-to-market efforts. It's important to note these aren't just cloud-only growth vectors. We believe they represent durable growth drivers for both Confluent Cloud and Confluent Platform. For example, in Q1, revenue outperformance was driven by on-prem momentum with Confluent Platform and its critical role in closing large enterprise deals with our OEM partners. Our well-diversified growth strategy gives us resilience and flexibility, enabling us to continue to drive durable and profitable growth. In closing, our first quarter results are a testament to the resilience of our business and our ability to capture our market opportunity. With a large TAM, category-defining technology, and an exceptional team, we are firmly positioned to sustain long-term growth and profitability. Now, Jay and I will take your questions.