Confluent, Inc.

Welcome to the Confluence second quarter 2025 earnings conference call. I am Shane Zee from Investor Relations, and I'm joined by Jay Kreps, 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 third quarter of 2025 and fiscal year 2025. These following 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 the most recent Form 10-Q filed 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 price release and supplement financials, which can be found on our Iowa site at investors.confluent.io. References to profitability on today's call refer to non-GAAP operating margin unless data otherwise. And with that, I'll hand it over to Jay.

Thanks, Shane. Good afternoon, everyone, and welcome to our second quarter earnings call. Confluent delivered a solid second quarter, highlighted by a 21% growth in subscription revenue, 28% growth in Confluent Cloud revenue, and non-gap operating margin of 6%, up approximately 6 percentage points. Additionally, our DSP monetization continues to gain traction, with Flink ARR growing approximately 3x over the past two quarters. This is a testament to our complete data streaming platform strategy and our strong positioning for the future shaped by agentic real-time AI. Before getting into the broader business update, I'd like to start by sharing some observations on our cloud business. In Q2, our larger customers continued their optimization efforts and adopted new use cases in more measured pace. While we are confident that this elevated level of optimization will eventually subside, our outlook for the second half assumes consumption growth notably below what we've seen in the same period of prior years. Rohan will provide further details in his remarks. Encouragingly, we've seen some customers commit to larger multi-year deals following the optimization efforts they undertook last year. This helped accelerate our RPO growth to 31% in the quarter, reflecting the deepening of our customer relationships as they plan for long-term growth. To accelerate use case expansions and support the long-term growth trajectory of our cloud business, we're driving operational enhancements across several areas in the business. This includes two key focus areas Ryan McBann has identified following his first 90 days as Chief Revenue Officer. First, we're improving coverage ratios between AEs, SEs, and post sales roles to strengthen execution in the field. This higher touch integrated approach enhances account ownership and provides tighter customer alignment in driving use cases into production across our enterprise customer base. This has shown early results in the second quarter as we've seen a sequential increase of more than 40% in late stage pipeline progression. Second, we're accelerating the build-out of our DSP specialist team to drive multi-product selling. This team focuses on building repeatable high-impact sales plays that include pricing strategy, go-to-market messaging, and streamlined migration offerings that combine tooling and professional services. We've also seen early signals of success with this specialization model, with several customers accelerating their production go-live of DSP use cases in the quarter. Together, these changes are designed to enable the field to move faster and unlock greater value from our platform selling strategy. In parallel, we're doubling down on three areas where we're already seeing strong traction. The first is replacing CSP streaming offerings with Confluent. We've had success displacing these CSP offerings with win rates well above 90%. This is an area where we feel our product capabilities and TCO story have improved enormously over the last year, with differentiated offerings like break clusters, enterprise clusters, and warp stream. Already in Q2, we saw more than two dozen displacements against a single CSP offering. We plan to amplify this success by intentionally targeting these offerings and increasing our number of at-bats against these competitors. Speaking of WarpStream, we're seeing positive trends there as well. The large majority of our WarpStream business in Q2 is incremental. Even in existing customers, we're seeing customers increase their spend with Confluent through WarpStream while actually lowering their overall cloud infrastructure costs. For example, two customers, a major retail investing platform, and a leading prepaid mobile provider both deployed WarpStream for their high volume logging and telemetry workloads in Q2. These customers increased their spend with Confluent by 30% while decreasing overall CSP infrastructure costs roughly 50%. It's a great example of how we're helping customers scale efficiently while delivering meaningful cost savings. The second area that we're doubling down on is our partner ecosystem. Partners are instrumental in broadening our footprint and driving customer expansion, especially as we scale into a multi-product platform company. We continue to see incredible traction in this area. In the past year alone, we've launched a new OEM program and partnered with leading AI vendors to launch a new AI accelerator program. At the same time, we've deepened key partnerships with Jio, SCCC, Databricks, EY, and most recently Infosys. This expanded collaboration with Infosys, a global leader in next-generation digital services and consulting, is the first major partnership under this new investment. As a partner in our OEM program, Infosys has seen firsthand the growing demand for data streaming. This is a meaningful step forward in our broader strategy to deepen partnerships with leading system integrators. To underscore the strategic value of our partner ecosystem, well over 20% of our business over the past year has been partner sourced. Looking ahead, our partner ecosystem will be an important area of continued investment and co-innovation. We believe deepening partner engagement across Confluent Platform and Confluent Cloud will fuel our growth and accelerate our global market penetration. The value of our partner ecosystem can best be understood through our customers' lens. A leading global financial market infrastructure provider that processes trillions of dollars of security transactions daily set out to create a shared Kafka service across its business. The goal was to enable real-time data streaming at scale with the kind of governance needed for a systemically important institution. However, they faced challenges with the specialized staffing required and the complexities of operating Kafka as a shared enterprise service. As the organization's longtime transformation partner, EY went beyond pure technical guidance. They helped define a broader vision, positioning Confluent as the strategic foundation for enterprise-wide data streaming. After the deal closed, EY and Confluent partnered to launch a modern streaming center of excellence that helped the company evolve from siloed messaging to a unified enterprise-wide streaming strategy. With EY's trusted relationships, the focus has shifted to scaling high impact streaming use cases across the business. Together, EY and Confluent are building a foundation for sustained innovation, enabling this market leader to turn real-time data into a true competitive advantage. The third area where we're doubling down is Flink. While Flink is still a small part of our overall business, it has experienced exponential growth with the sequential dollar increase in ARR accelerating for four consecutive quarters. Our Flink business is approaching 10 million in ARR and nearly tripled over the first half of the year. This includes strong contributions from both Confluent Cloud and Confluent Platform with fairly even ARR split between the two. We now have three customers with more than 1 million in Flink ARR and a diverse, rapidly expanding base of customers well into their first set of use cases. Capturing the processing of real-time data is one of the most strategic elements of our DSP strategy. This allows us to make real-time use cases much easier to build and to capture the spend on these use cases. The rapid growth of our Flink offering is evidence that this strategy is working. Wix is a great example of the power of our Flink offering. Wix is the global platform behind more than 100 million websites, serving a billion users every year. As they expanded to analytics and AI-driven personalization, it became clear that they needed a more scalable real-time data infrastructure. Their batch pipelines and self-managed Kafka setup simply couldn't keep up. To support their next stage of growth, Wix turned to Confluent Cloud and our fully managed Flink offering. Today, they process over 30 billion events per day in real time across multiple regions and clouds. Flink is now central to Wix's data architecture. It filters, enriches, and joins data streams in real time, powering hyper-personalized web experiences, live A-B testing, and Wix analytics, which gives users and developers immediate insight into site activity. With Flink and Confluent's governance tools, Wix delivers low-latency, trustworthy data at global scale. That's helped them increase developer velocity, improve customer experience, and cut down on operational overhead. Confluent is now a key part of Wix's long-term data platform strategy. And finally, we've been excited to see AI workloads beginning to move towards production in rapidly growing volumes. In 2024, much of the enterprise use of AI was early experimentation, with only a few dozen production use cases. This year, we expect production AI use cases to grow 10x across a few hundred customers. A few of my favorite examples from Q2. A public sector organization in New Zealand is deploying AI agents to automate complex regulatory workflows and cut citizen response time from hours to minutes without operational overhead. An astronomy institute is deploying AI agents to process telescope alerts in real time to filter noise and catch rare, fast-fading cosmic events before they're lost. A major Philippine power company is deploying AI agents to interpret real-time alerts, surface critical failures early, and prevent million-dollar outages. An international sports network is generating real-time commentary that adapts to the flow of the game and player performance. Let me go a little deeper on one such use case. We've talked about Notion before when they turned to Confluent after it became clear their data infrastructure couldn't scale or support their AI vision. Since then, they've made Confluent a much more strategic part of their business to accelerate the rollout of new AI capabilities. With over 100 million users, Notion needed a scalable real-time data architecture to power AI-driven search, content generation, and integrations. Their legacy messaging stack couldn't keep up with the volume of product activity, slowing innovation. By adopting Confluent Cloud, Notion built a fully managed event-driven architecture that supports key use cases across their platform. Using our pre-built connectors, they stream data into Snowflake and Amazon S3 to enable real-time analytics and AI workloads. Stream processing and schema registry ensures that every change in app is reflected instantly in their vector database, keeping Notion AI accurate and responsive. With Confluent, Notion has tripled platform team productivity, reduced operational overhead, and accelerated time to market for AI-powered features. Today, Confluent is the real-time backbone of Notion AI. In closing, while we're continuing to see some near-term consumption headwinds, I remain highly confident in the strength of our business. With our differentiated and complete data streaming platform and strong partner ecosystem, we're well positioned to capture a meaningful share of 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 second quarter was highlighted by solid top-line growth and continued margin expansion. These results underscore the strength and flexibility of our data streaming platform, helping customers unlock the full value of real-time data across cloud, on-premise, and BYOC environments. Turning to the Q2 results, Q2 subscription revenue grew 21% to $270.8 million and represented 96% of total revenue. Confluent platform revenue grew 12% to 120.3 million, reflecting solid performance in financial services and sustained momentum with our OEM partners. Cloud revenue grew 28% to 150.5 million, representing 56% of subscription revenue, compared to 52% in the year-ago quarter. As Shay mentioned earlier, consumption growth was impacted by continued optimization, with month-over-month trends trailing the same period in prior years. Additionally, an AI-native customer has been making a broad-based move towards self-management of internal data platforms, reducing their Confluent cloud usage as a result. We continue to support their data streaming needs and have now closed a Confluent platform deal with them in Q3. This represents a significant reduction in total spending with Confluent starting in Q4 and is expected to dampen our Q4 cloud revenue growth rates by low single digits. Turning to the geographical mix of total revenue. Revenue from the US grew 15% to $164.3 million. Revenue from outside the US grew 29% to $117.9 million. Moving on to the 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 Q2, subscription gross margin increased 70 basis points to 81.5% above our long-term target threshold of 80%. Operating margin increased 570 basis points to 6.3%, exceeding our guidance of approximately 5% and reflecting our continued focus on driving efficiencies across the company. Adjusted free cash flow margin increased 270 basis points to 3.9%. Net income per share was $0.09, using 367.3 million diluted weighted average shares outstanding. Fully diluted share count under the Treasury stock method was approximately $380 million. We ended the second quarter with $1.94 billion in cash, cash equivalents, and marketable securities. Turning now to customer metrics. On a year-over-year basis, total customer growth was in line with average growth rate of the previous four quarters. 20K plus ARR customer count grew approximately 8% to 2,497 and represented more than 95% of ARR. 100K plus ARR customers increased 10% to 1,439 and accounted for greater than 90% of ARR. $1 million plus ARR customers grew approximately 24% to 290. New $1 million-plus ARR customers continued to come from a wide array of industries and include a conversational AI and automation company, a global food service distributor, a Fortune 500 insurance provider, a cloud-based video platform, and a quality management software company for life sciences. NRR for the quarter was 114%, reflecting ongoing consumption headwinds in our cloud business, while GRR remained close to 90%. Turning now to guidance, based on current consumption patterns, our outlook for Confluent Cloud assumes month-over-month growth rates for the remainder of the year will remain notably below what we've seen in the same period of prior years. Given Confluent Platform's pipeline visibility in the back half of the year, we are raising our full-year growth expectations for Confluent Platform. This strength partially helps offset some of the consumption headwinds in our cloud business. For the fiscal third quarter of 2025, we expect subscription revenue to be in the range of $281 to $282 million, representing growth of approximately 17%. Non-GAAP operating margin to be approximately 7% and non-GAAP net income per diluted share to be in the range of $0.09 to $0.10. For fiscal year 2025, we are increasing the low end of our guidance range by 5 million, and we now expect subscription revenue to be in the range of 1.105 to 1.11 billion, representing growth of approximately 20%. non-GAAP operating margin to be approximately 6%, non-GAAP net income per diluted share to be approximately $0.36, and adjusted free cash flow margin to be approximately 6%. For modeling purpose, we expect cloud as a percentage of subscription revenue for Q3 to be approximately 56% and Q4 to be approximately 55%. Now I'd like to provide an update on the four strategic pillars of our growth, streaming, DSP, AI, and our partner ecosystem. First, we remain well positioned to lead the core streaming market across on-prem, BYOC, and cloud. Confluent Platform's continued strength has been driven by solid performance in financial services, early traction with partners, and our team's consistent execution. Wallstream consumption exhibited fast growth in Q2, benefiting from customers migrating latency-relaxed workloads from open-source Kafka to drive cost savings, while maintaining full control over their data. While consumption headwinds persist in our cloud business, we believe our two strategic focus areas, along with three targeted double down initiatives, will begin delivering meaningful results in a few quarters, helping accelerate our land and expand momentum across customer acquisition, use case expansion, and DSP monetization. Second, we are encouraged by the growing traction of our DSP portfolio across both cloud and on-prem environments. As Jay discussed earlier, in just two quarters this year, Flink ARR grew approximately 3x, approaching 10 million, with a fairly even split between cloud and on-prem versions of the product. This validates our strategy of building a complete platform for real-time data everywhere and our ability to take advantage of the shift left opportunity for stream processing. Third, Confluent's strategic importance in AI is only getting stronger as the world expands from Gen AI to Agentic AI. Over the past year, we have seen first-hand AI use cases in production growing from chatbots, semantic search, and content creation to code generation and iteration, multi-agent orchestration, agent recommendations, and much more. As Jay mentioned, this year we expect the number of production AI use cases to grow 10x across a few hundred customers. And fourth, we are seeing sustained momentum in our partner ecosystem. In less than a year, we have expanded multiple strategic partnerships, including GEO, SCCC, EY, Databricks, and Infosys, while continuing to build strong partnerships with Accenture, Deloitte, DCS, and more. Partners have sourced well over 20% of our business and we are capitalizing on this momentum by continuing to invest in our partners to unlock more revenue streams and to further expand our global reach and impact. In closing, we're pleased with our solid top line growth and margin expansion at scale in the second quarter. While there's still work to do in accelerating new use case expansion, we are encouraged by the traction we are seeing across core streaming, DSP, AI, and the partner ecosystem. We believe each of these areas represent a key driver of durable, profitable growth as we look ahead. Now, Jay and I will take your questions.