Confluent Q2 2025 Earnings Report

Confluent EPS Results

• Actual EPS: $0.09
• Consensus EPS: $0.08
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: $0.06

Confluent Revenue Results

• Actual Revenue: $282.29 million
• Expected Revenue: $278.32 million
• Beat/Miss: Beat by +$3.97 million
• YoY Revenue Growth: +20.10%

Confluent Announcement Details

• Quarter: Q2 2025
• Date: 7/30/2025
• Time: After Market Closes
• Conference Call Date: Wednesday, July 30, 2025
• Conference Call Time: 4:30PM ET

Confluent (NASDAQ:CFLT) operates a data streaming platform in the United States and internationally. The company provides platforms that allow customers to connect their applications, systems, and data layers, such as Confluent Cloud, a managed cloud-native software-as-a-service; and Confluent Platform, an enterprise-grade self-managed software. It offers connectors for existing applications, and IT and cloud infrastructure; Apache Flink services that allows teams to create reusable data streams that can be delivered real-time; ksqlDB, a data-in-motion database that allows users to build data-in-motion applications using a few SQL statements; stream governance, a managed data governance suite that is designed for the intricacies of streaming data, which allows teams to accelerate data streaming initiatives without bypassing controls for risk management and regulatory compliance; and stream designer which builds streaming data pipelines visually. In addition, the company offers professional services comprising packaged and residency offerings; education offerings consisting of instructor-led and self-paced training and certification guidance, technical resources, and access to hands-on training and certification exams; and certification programs. It serves banking and financial services industries, as well as retail and e-commerce, manufacturing, automotive, communication service providers, gaming, public sector, insurance, and technology industries. The company was formerly known as Infinitem, Inc. and changed its name to Confluent, Inc. in September 2014. Confluent, Inc. was incorporated in 2014 and is headquartered in Mountain View, California.

Confluent Q2 2025 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: Confluent delivered Q2 results with 21% subscription revenue growth, 28% cloud revenue growth, and a non-GAAP operating margin of 6%, up six percentage points year-over-year.
• Negative Sentiment: Cloud consumption slowed as large customers optimized existing deployments and adopted new use cases at a measured pace, prompting expectations for H2 consumption growth notably below prior years.
• Positive Sentiment: Flink ARR has tripled over the past two quarters, approaching $10 million, underscoring strong momentum in Confluent’s DSP strategy.
• Positive Sentiment: Confluent reported > 90% win rates displacing CSP streaming offerings, and customers using WarpStream increased spend by 30% while cutting infrastructure costs by 50%.
• Positive Sentiment: Over 20% of Confluent’s business was partner-sourced in the past year, supported by new OEM and AI accelerator programs and expanded ties with Databricks, Infosys, and other integrators.

Presentation

[Shane Xie, VP - IR at Confluent]

Welcome to the Confluence Second Quarter twenty twenty five Earnings Conference Call. I'm 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 2025 and fiscal year twenty twenty five. These forward looking 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 Q filed with the SEC.

[Shane Xie, VP - IR at Confluent]

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 our 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 supplement financials, which can be found on our IR website at investors.confluent.io.

[Shane Xie, VP - IR at Confluent]

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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Thanks, Shane. Good afternoon, everyone, and welcome to our second quarter earnings call. Confluent delivered a solid second quarter highlighted by 21% growth in subscription revenue, 28% growth in Confluent Cloud revenue and non GAAP operating margin of 6%, up approximately six 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Before getting into the broader business update, I'd like to start by sharing some observations on our cloud business. In q two, 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 multiyear deals following the optimization efforts they undertook last year.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 McBan has identified following his first ninety 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 multiproduct 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 q two, we saw more than two dozen displacements against a single CSP offering.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 q two 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 q two.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 multiproduct platform company. We continue to see incredible traction in this area.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 GEO, SCCC, Databricks, 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 in co innovation. We believe deepening partner engagement across Confluent Platform and Confluent Cloud will fuel 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 create a shared Kafka service across its business.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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, 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, 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

With trusted relationships, the focus has shifted to scaling high impact streaming use cases across the business. Together, 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 $10,000,000 in ARR and nearly tripled over the first half of the year.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 $1,000,000 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Wix is a great example of the power of our Flink offering. Wix is the global platform behind more than a 100,000,000 websites, serving a billion users every year. 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Today, they process over 30,000,000,000 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 AB testing, and Wix Analytics, which gives users and developers immediate insight into site activity. With Flink and Confluence 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Confluence 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 10 x across a few 100 customers. A few of my favorite examples from q two.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

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 a 100,000,000 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Using our prebuilt connectors, they stream data into Snowflake and Amazon s three 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.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

With our differentiated and complete data streaming platform and strong partner ecosystem, we're well positioned to capture a meaningful share of the $100,000,000,000 plus data streaming market. With that, I'll turn it over to Rohan.

[Rohan Sivaram, CFO at Confluent]

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.

[Rohan Sivaram, CFO at Confluent]

Q2 subscription revenue grew 21% to 270,800,000.0 and represented 96% of total revenue. Confluent Platform revenue grew 12% to $120,300,000 reflecting solid performance in financial services and sustained momentum with our OEM partners. Cloud revenue grew 28% to $150,500,000 representing 56% of subscription revenue compared to 52% in the year ago quarter. As Jay 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.

[Rohan Sivaram, CFO at Confluent]

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 164,300,000 Revenue from outside The US grew 29% to $117,900,000 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.

[Rohan Sivaram, CFO at Confluent]

In Q2, subscription gross margin increased 70 basis points to 81.5%, above our long term target threshold of 80%. Operating margin increased five seventy 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 two seventy basis points to 3.9%. Net income per share was $09 using 367,300,000.0 diluted weighted average shares outstanding. Fully diluted share count under the treasury stock method was approximately $380,000,000.

[Rohan Sivaram, CFO at Confluent]

We ended the second quarter with $1,940,000,000 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. 20 ks plus ARR customer count grew approximately 8% to 2,497 and represented more than 95% of ARR. 100 ks plus ARR customers increased 10% to fourteen thirty nine and accounted for greater than 90% of ARR.

[Rohan Sivaram, CFO at Confluent]

Dollars 1,000,000 plus ARR customers grew approximately 24% to two nineteen. New $1,000,000 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.

[Rohan Sivaram, CFO at Confluent]

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 2025, we expect subscription revenue to be in the range of $281,000,000 to $282,000,000 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 $09 to $0.10 For fiscal year twenty twenty five, we are increasing the low end of our guidance range by $5,000,000 and we now expect subscription revenue to be in the range of 1,105,000,000.000 to $1,110,000,000 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.

[Rohan Sivaram, CFO at Confluent]

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. Warfstream 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.

[Rohan Sivaram, CFO at Confluent]

As Jay discussed earlier, in just two quarters this year, Flink ARR grew approximately 3x, approaching 10,000,000, 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 Agenetic Over the past year, we have seen firsthand AI use cases in production growing from chatbot, 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 100 customers. And fourth, we are seeing sustained momentum in our partner ecosystem.

[Rohan Sivaram, CFO at Confluent]

In less than a year, we have expanded multiple strategic partnerships, including GEO, SCCC, Databricks, and Infosys, while continuing to build strong partnerships with Accenture, Deloitte, TCS, 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.

[Shane Xie, VP - IR at Confluent]

Thanks, Rohan. To participate in the q and a, please click the raise hand icon. We ask that you limit the q and a to one question and one follow-up. And today, our first question will come from Matt Hepper with RBC followed by Deutsche.

[Matthew Hedberg, Software Analyst at RBC Capital Markets]

Great. Thanks, Shane, for the question. Guys, for for the time today. I guess, you know, I wanted to understand a little bit more of the consumption consumption optimization trends you talked about and and if that's more macro or company specific. And, realizing you you noted there was an AI customer that feels like they're changing some of their consumption.

[Matthew Hedberg, Software Analyst at RBC Capital Markets]

But was there anything recurring in some of these conversations? And how prevalent were they? I think last quarter, mentioned it was a handful of top 20 customers. But just trying to get a sense of how that trended sequentially.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I would say it's a similar dynamic. You know, I do think this is, you know, broadly of the same sort of what we've seen across other companies where, you know, customers are happy that, you know, plan to be using more data streaming over time, are putting effort into making sure what they're, you know, what they bought, they're getting the most value out of. You know, this hit us a little bit later than some of the other consumption companies, you know, but but it's kinda persisted a a few quarters longer. And, yeah, I would put the AI native customer in sort of a different category where it's not really an optimization thing at all.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

They're, you know, you know, broadly moving into, you know, a different way of kinda operating internally, and I think this is across a number of different vendors, including us. So we were, you know, happy to be able to support them, you know, with the Confluent platform deal. You know, they continue to use, our cloud product in more limited use cases, but there is a kind of overall reduction in spend, and it's definitely a headwind for q four, for cloud. You know, that that's a Got it. A number of kind of positive forces at work here.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So if you look at, you know, where these customers are going, longer term, you know, I think we called out the 31% growth in RPO, and, you know, I think that is, you know, in large part, a bunch of customers upping their overall commitment. That tends to be, you know, a headwind to short term consumption. You know, bigger commitment means a little bit higher discount levels, but, you know, overall kinda gives an indication of the trajectory of their spend.

[Matthew Hedberg, Software Analyst at RBC Capital Markets]

Well, I guess on the other that that's helpful, Jay. And I guess the other thing that you pointed out is, you just you know, the the the growth in production AI workloads across a couple 100 customers. I guess I'm wondering, you know, it it feels to to us like the relevancy of streaming and processing is elevated in the AI first world. You know, how should we think about, you know, some of those production workloads eventually, you know, positively impacting subscription growth as we think, you know, forward over the next year or so?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Yeah. I I I think it's a very positive force. You know? Ultimately, this is turning into, I think, a really important ingredient in the architecture for AI applications.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

And it makes logical sense. Like, if you wanna have some kind of agent that's taking action in the business, it has to have an up to date, you know, set of context data on what's happening across the business. And so, you know, I I think we've certainly found ourselves drawn into a set of use cases around that. You know, I think the ocean the Notion story is a great one, but, you know, there's a number that I called out across different industries and domains. So I I think that's a very positive for us and not the only one.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, I I I think the Flink growth is a huge deal. You know, it's it's 10,000,000 in ARR, which is very small, but it grew three x, you know, over the last six months. And that's, you know, that's actually very fast growth for something in the infrastructure space. And in many ways, you know, Flink is the crux of that DSP expansion for us where, you know, we we feel like going from an important ingredient in the real time architecture to a full platform. The hard part of that is capturing the application workloads, like the real time processing.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

We know what that's about. But the question is, can you build a product that, you know, actually does it and that customers can use and benefit from? And I I think that's gone quite well where it's now producing across both cloud and CP and, you know, very nice growth rate. So, you know, not not something that determines the overall number at this point, you know, but we're very excited by the that early progress, and we wanna see it continue.

[Matthew Hedberg, Software Analyst at RBC Capital Markets]

Thanks, Jeff.

[Shane Xie, VP - IR at Confluent]

Alright. Thanks, Matt. We'll take our next question from Brett Zellnick with Deutsche Bank followed by Morgan Stanley.

[Brad Zelnick, Managing Director at Deutsche Bank]

Great. Thanks so much, Shane, and and nice to see you guys. Jay, a lot of lot of exciting things happening, a lot of good data points coming out of this quarter, but at the same time, you you still continue to be surprised by this optimization activity that's occurring with your large customers. You then talked about Ryan McMahon ninety days in and the two key focus areas and operational enhancements that he's making. I was just wondering if that in relationship to what's happening with large customers or is that in the optimization that you're seeing or is that completely separate?

[Brad Zelnick, Managing Director at Deutsche Bank]

And can you maybe just slow down and explain a little bit why you're confident that these investments that you're gonna make in the coverage ratios across AEs, SEs, and and post sale support as well as the build out of the DSP specialist team is really gonna make a difference and over what timeline?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Yeah. It's a good question. So, yeah, I would think of it this way. You know, there's some amount of optimization customers are doing at any given time.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Right? I I think that's been, you know, exaggerated in recent quarters. Right? And and then when you think about what's the balance, you know, the balance of growth is new use case additions, you know, minus optimizations. And when we think about what we're in control of, it is these new use case acquisitions.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Are we going out and winning the new workloads? Are we making sure we're connecting with those? Are we bringing in, you know, the right customers? And so, you know, that's that's obviously where our focus is. The you know, I think we've seen very good early results from these changes that Ryan has made, you know, on some of these alignment things and the SE ratio.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, this was one of the changes we made, you know, both to get good market costs in line and through our consumption change. I think just didn't quite work the way we wanted. You know, we were able to change change to a, you know, better coverage model without negative cost impact, And I think that's paid off in, you know, some of the progression of streaming projects that we've seen already. So I called this out just like, you know, we measure the early stages of this in terms of kinda late stage pipeline. How is that trending?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

And this is consumption pipeline, so it's actual customer workloads heading to production. You know, that's up, quite substantially. You know? I I think it's at greater than 40%, you know, q one to q two, and I think that's a good result that came out of some of the operational improvements there. So that's the early indicator.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Now, obviously, we don't count our chickens till they're hatched, but, you know, those are the things we look at when we think about what the kind of forward momentum is.

[Brad Zelnick, Managing Director at Deutsche Bank]

Great. Thank you. That's helpful, Jay. And maybe Rohan, for you, just as we think about your messaging coming out of last quarter, again, coming out of q two as well. What can you tell us about the approach to guidance and whether it's in the form of conversion rates or anything else to help us really appreciate what is expected in the back half and how much this may or may not be derisked at this point? Thank you very much.

[Rohan Sivaram, CFO at Confluent]

Yeah. Brad, thanks for your question. Historically, as I've said in the prior call as well, we've typically seen a quick consumption rebound after, say, a quarter of optimization. You know, best example recent example is q two to q three of last year. Specifically, what we saw in the quarter was the larger customers optimizing that continued, and the adoption of new use cases were more was more measured.

[Rohan Sivaram, CFO at Confluent]

Given the dynamic of q two and q one, what we are doing right now for cloud is we are primarily assuming the cloud outlook for month over month growth rates to be notably below what we've seen in the same period of prior years. So that's what we've done for cloud. So despite this dynamic, I wanna take a step back and just talk a little bit about the total guidance. We're actually raising our fiscal year twenty five subscription revenue guide at the midpoint. And what's supporting this is the strength in our CP business.

[Rohan Sivaram, CFO at Confluent]

We have visibility into second half pipeline. And also on the cloud side, as Jay briefly touched on, we are seeing a bunch of green shoots. First of all, the Flink momentum. When you think about Flink, it is approximately tripled in the first six months of the year, closing in on 10,000,000 in ARR. The late stage pipeline projection is we saw a sequential improvement of greater than 40%.

[Rohan Sivaram, CFO at Confluent]

And finally, you know, some of our customers committing to larger multiyear deals following periods of optimization. That shows up in our RPO numbers. So when you kind of take all of this together, the back half guidance is for cloud. You know? We're not assuming month over month growth rates.

[Rohan Sivaram, CFO at Confluent]

It's actually notably below historical averages for same periods in prior years. For platform, we have visibility into our pipeline. And for the cloud green shoots, it's like a portfolio approach. You know? There are upside levers in that that we will realize.

[Rohan Sivaram, CFO at Confluent]

Like Jay said, we're not, you know, counting our chickens before they hatch.

[Brad Zelnick, Managing Director at Deutsche Bank]

Thank you, Ron.

[Shane Xie, VP - IR at Confluent]

Great. Thanks, Brett. We'll take our next question from Sangison with Morgan Stanley followed by Bernstein.

[Sanjit Singh, Executive Director at Morgan Stanley]

Thank you for taking the questions. Jay, I wanted to go back to some of the go to market changes that you guys been rolling out over the past couple of years, particularly the move to compensating sales reps on incremental consumption. Just how has that been going, and to what extent is that still a friction or non friction, point when it comes to driving incremental cloud consumption growth?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I think overall, it's gone well. I think it was a critical change for us just to be aligned to what the company is trying to drive and to actually be able to unlock the use cases, be able to have compensation on some of the DSP offerings that might get added on initially even after your commit. So there you know, a whole set of motivators that I, yeah, I think it's actually helping with. There's certainly been adjustments we've made along the way, including the things I called out in the script, you know, to try and make sure we're really optimizing for it.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So, you know, I think that those will, you know, help us realize even more results from it.

[Sanjit Singh, Executive Director at Morgan Stanley]

Awesome. And then on Flink, on that you know, we noticed in our customer conversations that Flink was, sort of building a momentum as well. I know that Flink started as a part of Confluent Cloud. I think was it second half of last year or middle of last year? You sort of introduced it, into Confluent platform.

[Sanjit Singh, Executive Director at Morgan Stanley]

Was that, like, the unlock? And can you sort of explain to us, like, we think about the Flink opportunity. Why is it such an even balance between cloud and on prem?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. It's, both good questions. So so, yeah, you know, there it's been a a buildup on Flink because we had to you know, because of German law announced one of the acquisitions we made as we're doing this, we had to tell people we were doing something with Flink well before we had the product out. You know, it did get into the market, you know, mid last year. Obviously, for us, then we have to ramp it across the different cloud providers, open it up for the kind of private networking types that certain customers have to really get the full unlock.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

And then we've seen, you know, post that great monetization results. And I I think that will increase you know, there's future unlocks coming there. You know, the this area of data processing, people know what it is. They know they watch it. They know they need to do it in real time.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, it's a question of really getting something that's super solid that does everything a modern platform does, but does it continuously and in real time. So I I think it's been exciting to kinda get to that point with customers. You know, that that ramp has been quite steady. So if you look at cloud, you know, the just the growth quarter over quarter, but if you were to look into it month over month, is just a very steady ramp. The reason for that is it is a serverless offering.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So adopting Flink costs you nothing. You know, it's each incremental query and workload that you're kind of adding that's that's building up that consumption. You know? And that is the nature of that business. It so kind of building that momentum then becomes a very powerful force even in customers that have adapted.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

They're continuing to add queries and grow their consumption. CP Flank is a little different where, you know, the tendency is you're kind of predeploying. Right? So it will come in bigger chunks. Like CP, it will tend to appeal to some of these larger customers that have data centers, has a little bit more of an opportunity to kinda migrate in place workloads.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So for that reason, it tends to be, you know, the smaller number of customers and, you know, capturing a bit more, you know, in each chunk. So a little bit different between both, but the, you know, kinda net net is we're contributing you know, both are contributing. We're serving customers across both, and both are actually growing very nicely between the two.

[Sanjit Singh, Executive Director at Morgan Stanley]

Awesome. Thank you.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah.

[Shane Xie, VP - IR at Confluent]

Thanks, Sanjit. We'll take our next question from Peter Weath with Bernstein followed by William Blair.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

Thank you, and appreciate, all the detail you've been giving particularly around, you know, some of the optimization that's been going on. You know, one of the things that that struck me is, we've been focused on on these big, customers. But I guess also when I'm taking a look at, some of the customer bands that that you report, you know, the kind of 20 to a 100, k size customers, which would I would think would be kind of your fastest growing kind of future cohort that will hopefully graduate into those 100 k plus million, plus customers over time, actually has been, you know, probably the weakest, of of any of those cohorts, this last quarter. How how should we think about, you know, the kind of incremental, number of customers being added to that segment as a kind of a future signal for, growth? And perhaps it's some of the sales initiatives that are going on that are gonna be trying to drive a lot more customers into that kind of early phase that that turn into the very big customers over time.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Yeah. You know, so if you look across the customer bands, as you say, kind of strengthen 100 k plus, strengthen million dollar plus, you know, lighter on the 20 k plus. And we think that's a key metric, so that is a a point of focus for us. Heading into this year, I do think we made some changes that, you know, lost some of the focus there.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

In some of what I described, we are trying to make sure that we're nailing that. So in in particular, I I do think these CSP takeouts that I described are an awesome opportunity for that. That's an area where we're seeing a lot of early success. There are, you know, a lot of customers out there that have adopted, you know, one of the offerings from the cloud providers. And the reality is those offerings, you know, have never been great.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

But increasingly, as our product portfolio has kinda filled out, we have something that's not just a better offering, but it's actually a better deal. And so you you kinda have something that's more complete, better performance, and kinda better price point with freight and these enterprise clusters, WarpStream. And so early results from that are good, and we think that that particular program and a focus on those lands is a great way of, you know, kinda getting out to more breadth.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

And is there anything that we should read into that around kind of increased churn levels? I I noticed some of the commentary changed around gross revenue retention. I think historically, you've said, hey. It's above 90%. This quarter, said it's you know, remains about 90%.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

I didn't know if that was, an increased, churn and that was being seen in that customer segment, or I'm just reading too much into that, commentary.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I I wouldn't attribute, you know, too much to that segment overall. I I think it's mostly about really driving, you know, the lands in that segment is the the biggest contributor.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

Okay.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

Thank you.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

About that at all, Ron.

[Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein]

Thank you.

[Rohan Sivaram, CFO at Confluent]

No. I think we're talking to Jay.

[Shane Xie, VP - IR at Confluent]

Great. We'll take our next question from Jason Ader with William Blair followed by Mizuho.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Yeah. Thanks, Shane. Can you hear me okay?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Loud and clear.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Gotcha. Okay. Jay Jay, I understand the challenges in predicting the customer consumption patterns and definitely appreciate the transparency on what's happening at the ground level. But I think we all expected some improvement in the business following the refinement in the sales comp model last year, the broadening of the product set. I mean, pretty significant broadening of the product set over the last year and a half or so, then, you know, greater amount of AI adoption where we're obviously getting closer to the tipping point.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Now it feels like feels like we're kinda back to square one a little bit and waiting for things to get better. So why should investors believe that this time is different?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Yeah. It it's a fair question. I, you know, I I think a lot of the things we said would contribute, you know, are starting to do that. And I think we shared a little bit of that.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Right? We've talked about some of the DSP offerings. You know, I think we shared a bit about what's happening with Blink. I think we've talked a little bit more quantitatively about some of these AI use cases and what we're seeing there. You know, there there is a headwind with, you know, some of the existing large customers in optimization.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

I do think that, you know, these things that are smaller but growing fast, they eventually do predominate as they grow. You know? But to cancel each other out, they have to get to the scale that matters. So, you know, in those positive tailwinds, I would include those things I just mentioned. I would include the buildup of, you know, RPO and commitments in cloud, which I think is a positive sign, you know, in terms of what customers' intentions are over time, as well as that overall progression of pipeline, which I do think is, you know, a reflection of kind of the focus on this within our sales organization.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Gotcha. I mean, it it's gotta be frustrating for you.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Well, there there's different forces. I mean, if you step back, right, I think Confluent has a fantastic position in the data landscape. You know, if you ask, is there gonna be more streaming in, you know, three years or less? There's gonna be a lot more.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

And kind of our hand on the product side has gotten better. So so, yeah, it's frustrating when you have a dynamic with a subset of customers. You know? But but, nonetheless, you know, I do think the bigger picture, I would say I'm as excited about where we're at as ever. And, yeah, I think there's a lot of good things coming out of the business.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Right. One quick follow-up for Rohan. Rohan, can you help us on the NRR outlook? It dipped to the $1.24. I guess that's the consumption driving that.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Do you think it will continue to dip just given some of your comments on the back half?

[Rohan Sivaram, CFO at Confluent]

Yeah. Jason, you rightly called it out. You know, just for the broader group of folks here, when you think about our cloud business, NRR and GRR are essentially calculated based on the last three month consumption on an annualized basis. As a result, just the it has an outsized impact. The current quarter consumption typically has an outsized impact on both these metrics.

[Rohan Sivaram, CFO at Confluent]

So in line with our cloud second half outlook that we shared, we expect to see near term pressure on both the metrics. Having said that, I'll tell you that, you know, all the focus that Ryan's driving on the go to market side, begin to double down initiatives, coupled with the green shoots mentioned earlier, they will be tailwinds. So there are bunch bunch of puts and takes to the NRR as we look at back half of the year and beyond.

[Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair]

Thank you, guys. Good luck.

[Shane Xie, VP - IR at Confluent]

Thanks, Jason. We'll take our next question from Gray Moskowitz with Mizuho followed by Chore Securities.

[Gregg Moskowitz, MD & Senior Enterprise Software Analyst - Equity Research at Mizuho Financial Group, Inc.]

Great. Thanks thanks, Shane. So, Jay, I'm curious to hear your thoughts on your former company's decision to move away from Kafka due to perceived scalability and operational challenges. You know, just given your history and your very deep knowledge of Kafka and the broader streaming space, your perspective on that would would certainly be helpful.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I you know, this is kind of a internal system inside of LinkedIn where where I used to work, you know, 10 ago. You know? Yeah. I think it's kind of a nonissue.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

I mean, LinkedIn has very custom internal infrastructure. You know, they they actually made this change a long time ago. I think they only talked about it recently. You know, their their internal thing is very tied to their infrastructure and not open source, so it doesn't represent any kind of competitive threat to Confluence or anything like that. In terms of why they've done that, you know, they they built their own custom database.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

They built a lot of custom things at this point. You know, they're they're not even running in the cloud even though they're owned by Microsoft. So I think, you know, they have a bit of an in house culture, which, yeah, I think probably is a driver for some of this stuff.

[Gregg Moskowitz, MD & Senior Enterprise Software Analyst - Equity Research at Mizuho Financial Group, Inc.]

Super helpful. And then just, either for Jay or Rohan. So, you know, when I look at Confluent Cloud, certainly, it was a shining star, and has been a shining star of the Confluent growth story for quite some time. Obviously, the growth, more recently for this segment is is slowing down a fair amount. Any concerns that there may be competitive and or pricing issues contributing to some of the incremental challenges that Confluent Cloud is experiencing right now, or are you just not seeing that when it comes to win rates and when it comes to discounting?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. It's a good question. So, yeah, we we haven't seen a huge change in the competitive dynamic overall. You know, if anything, I think our hand versus, you know, some of the cloud provider offerings has strengthened, and, you know, that's a focus area for us to go after those. The you know, on the pricing, we have introduced offerings that open up, you know, a set of workloads, freight and enterprise clusters.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

We're starting to see, you know, I think very strong early success with those. It always takes time for these new things to really go capture the opportunity, but but I do think that's a, you know, big opportunity for us to get out into that.

[Gregg Moskowitz, MD & Senior Enterprise Software Analyst - Equity Research at Mizuho Financial Group, Inc.]

Great. Thanks, Jay.

[Shane Xie, VP - IR at Confluent]

Yeah. Thanks. We'll take our next question from Millet Junk with Ture Security followed by TD Cowen. Miller, you're on mute. Alright.

[Shane Xie, VP - IR at Confluent]

Why don't we come back to you? We'll go to Derek first.

[Derrick Wood, Managing Director at TD Cowen]

Great. Thanks, guys. I guess to start with you, Jay, could you give us a sense as to how much structural change we should be expecting from the field realignment efforts? And, really, how long you think that these these realignments will take to implement and when we should be thinking about them them driving some meaningful dividends?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I think we're starting to see, you know, good forward momentum there already. You know, there there have been changes within the team, and, yeah, I think those are ultimately positive things. Ultimately, when we bring in a new leader, we want them to change some things. Hasn't been a complete, you know, reorg of everything.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, we're broadly organized in the same way. But I do think coming into this year, we saw a few things that weren't quite right and have have made adjustments around them.

[Derrick Wood, Managing Director at TD Cowen]

And then, it's kind of related. I mean and and maybe for Rohan, but you, just looking at your net new customers, the $1,000,000 net new customers have been really strong. Net new on the $100,000 has been pretty weak in the quarter and kind of directionally under pressure for the last year or two. But what should we take away from these numbers? Has there been a go to market shift more at the large deal front?

[Derrick Wood, Managing Director at TD Cowen]

Or are some of these realignment efforts designed to kind of drive better activity at that $100,000 plus? Just curious how you're thinking about the the direction of these numbers.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I can take some of that, and, you know, Ron can chime in as well. You know, I I I do think kinda as I said on the the prior answer, you know, I I do think this is one of the points we wanna address in terms of kind of the alignment between some of the SDRs, SEs, how were they going after, what accounts they're targeting. You know, I do think we probably, you know, had more focus on some of the existing customers and so the you know, really make sure we're landing the right folks is critical. I think the, CSP takeout opportunity is a key initiative there where we think there's a good opportunity of things we haven't paid as much attention to that are that are quite right.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So we would like to see some results in that, you know, over the coming quarters. And, Ron, sorry. I I think you're feel free to jump in there.

[Rohan Sivaram, CFO at Confluent]

Yeah. I'll probably just add two points, Derek. The first is one of the things that we focus on internally is from top of the funnel to million dollars, how that customer cohort is progressing. And, you know, some of the focused areas that Ryan's driving, that's gonna just fine tune that motion even more. So that's one aspect of it.

[Rohan Sivaram, CFO at Confluent]

The second aspect of it on the larger customer front, our DSP penetration is a huge opportunity. And that's something that we're very focused on. What I can tell you is, like, with respect to our larger customers, we are having conversation in a substantial majority of them with respect to having some form of DSP continued usage. So in addition to what Jay said, those are the two focus areas that we expect to drive even better performance, not only on the bottom of the funnel, but also on the top of the funnel.

[Derrick Wood, Managing Director at TD Cowen]

Understood. Thank you.

[Shane Xie, VP - IR at Confluent]

Alright. Thanks, Derek. We'll go back to Miller and try one more time.

[W. Miller Jump, Equity Research Associate at Truist Securities]

Alright. Can you hear me now?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Now I'm clear.

[Shane Xie, VP - IR at Confluent]

Clear.

[W. Miller Jump, Equity Research Associate at Truist Securities]

Alright. Thank you very much for taking the question. Maybe just starting with the the large AI customer that you all mentioned in the prepared remarks. You know, moving back to Confluent platform, I guess I'm curious, like, is there an architectural advantage to supporting AI with platform? And do you anticipate realizing more of the AI AI opportunity on platform now after seeing this activity?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

No. I I don't think it's a structural thing. I would say it's unique to the circumstances of this customer. You know, the, ultimately, the AI opportunity is kind of across both platform and cloud. The you know, I think it's worth separating out selling into AI companies.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

There, there's obviously a set of startups that are very predominant in the cloud, and then, you know, you'd probably read some of these larger companies are making investments in on premise data centers and more self management and so on. So it's more determined by the operations of the company than the, you know, industry or use case. And then when you think about the larger opportunity with AI, do you think it is the enterprise use cases deploying AI in their business? And that is, again you know, it depends on where that is happening. You know, the much of it in the cloud, but, you know, there's also large financial services organizations doing big interesting things in their own data centers.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

And so, you know, we'll see it across both sides.

[W. Miller Jump, Equity Research Associate at Truist Securities]

Okay. And and maybe just this is a follow-up on kind of Ron's commentary on the DSP traction that you're seeing. Obviously, optimization headwinds are clouding this a little bit. But, yeah, you know, on the one hand, there's really promising DSP uptake that you all are talking about, but at the same time, we continue to see cloud, decelerate despite that contribution. So I'm wondering if you could unpack that a little bit more.

[W. Miller Jump, Equity Research Associate at Truist Securities]

Like, are we seeing customers getting cost efficiencies on the streaming side that are then being applied towards the new capabilities, or is it something where there are actually less streams being created and they're just applying DSP to those?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. I I I think this is ultimately, you know, an efficiency question. Right? So we we've been through this, in the past. I would say it's broadly the same pattern of things.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Right? There's customers that are making kind of architectural changes to try and condense their workloads and squeeze more out of the infrastructure they're using. That's a natural thing you would do with all almost any kind of cloud, you know, offering, and that's certainly what we're seeing. The DSP growth, I think, is actually separate and super promising. You know, you what you need is for that number to get big enough that it, you know, outweighs, you know, effectively these very large Kafka installations.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, you know, not exclusively, but but certainly a number of them in some of these tech companies that are working very hard to cut cloud costs across the board. And so you kinda have two forces in the business. I will say, you know, the optimization, only optimize so much. Right? So it kinda trickles off, whereas the DSP growth, I think, is in the early days of a, you know, sustained run.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

So when I talk about just kind of, you know, overall a ton of optimism in the space, you know, I think that's one of the reasons why.

[Shane Xie, VP - IR at Confluent]

Great. Thanks, Miller. We'll take our next question from Mike Sikos with Needham followed by Barclays.

[Mike Cikos, Senior Analyst at Needham & Company]

Great. Thanks for taking the question here, guys. I know that you had spoken about the win rates, versus CSPs and that being an area of doubling down for you. I guess one of the things, it seems like it's a bit of a shift in message here given you guys have historically spoken about soaking up that Kafka opportunity. So to be going after the CSPs more directly, is that that potentially a longer sales cycle?

[Mike Cikos, Senior Analyst at Needham & Company]

Because now you're going into an organization that has been ingrained in some capacity with an existing vendor? And can you just kinda walk us through what are the mechanics been thus far that you've been able to evidence as far as those displacements you cited?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. Yeah. It's not a yeah. First of all, it's not exclusive. It's not like we're stepping back from the open source Kafka in any way.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, I I do think we probably pay less attention to these, you know, customers that had picked something from the cloud provider. It it's actually not a longer sales cycle. In some sense, it's easier because there's less of a team that does the self management that has to be displaced and accounted for. You know, you're basically swapping in a better product for less money. And so, yeah, when we look at just kind of the overall sales stats against that, one of the things that motivated us here was, you know, what we felt we'd done in the product portfolio, but part of it was just quantitative where we felt like, hey.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, these deals are, you know, winning at a high rate and progressing quickly, and we know where it is. So it makes it easy to kinda package it up and teach the sales team exactly how to do that competition.

[Mike Cikos, Senior Analyst at Needham & Company]

Understood. And then just a quick follow-up for Rohan. I know, again, we're talking about the changes to the cloud, consumption here. If if I go back a quarter ago, you guys were already assuming that we would not see a return to what normal behavior would be on that sawtooth pattern. And it sounds like, again, we're we're adjusting our guide here.

[Mike Cikos, Senior Analyst at Needham & Company]

So did the consumption trends in q two actually deteriorate from where we were just in q one? Can you provide some some more granularity on that front?

[Rohan Sivaram, CFO at Confluent]

Yes, Mike. You know, from an overall consumption q one to q two, I will put it in the category that the two dynamics we called out were fairly consistent, that optimization of larger customers and slower use case adoption. So those two continued. If you look at month over month growth rates, they were flattish to slightly down from q one to q two, And that's that's obviously driving us as we think about the second half to make sure that, you know, our assumptions around month over month growth rates are notably below what we've seen for the same period of prior years. So that's the dynamic on the cloud.

[Rohan Sivaram, CFO at Confluent]

However, you know, I I just want to remind around the green shoots that we called out in the call in different parts for prepared remarks. First, I mean, Jay spoke about the Flink and the momentum in Flink. And we, three x this year, we're closing in on the 10,000,000 run rate. Second, we spoke about WarpStream. That business also showed really good growth in q two, and the momentum is great.

[Rohan Sivaram, CFO at Confluent]

We spoke about the late stage pipeline progression, and we also spoke about larger customers starting to commit more. So all of these are green shoots. So at balance, obviously, you know, the consumption is baked into it, into our guidance for the back half, but some of the green shoots are something that, you know, we're excited to make sure we execute on and, you know, go and beat these numbers that we have.

[Mike Cikos, Senior Analyst at Needham & Company]

Understood. Thank you.

[Shane Xie, VP - IR at Confluent]

Alright. Thanks, Mike. We'll take our next question from Raimo Lenschow with Barclays followed by DA Davidson.

[Raimo Lenschow, Managing Director at Barclays]

Okay. Perfect. Thank you. Thanks for squeezing me in. The Rohan, if you talk about the the two drivers for the the situation we have on the cloud side, Like, how much of that is driven by just one customer, the one that you kind of mentioned for q four?

[Raimo Lenschow, Managing Director at Barclays]

So is that the majority of what's going on, or are we talking several accounts here?

[Rohan Sivaram, CFO at Confluent]

No. What what we said was, right now, like, the larger customers, broad based, like, from some of our larger customers, they are just optimizing and the slower use case adoption. If you look at guidance and what we spoke about, the primary the driver for guidance is our assumption for month over month growth rate. So that's the primary driver. The dynamic that we saw in the first half of the year and in q two, which is just the larger customers optimizing for cost and slower use case adoption, that's the driver that we spoke about.

[Rohan Sivaram, CFO at Confluent]

With respect to the AI native customer, that's just us providing some color commentary as we look at the back half of the year and how we think about some of the puts and takes for the cloud business.

[Raimo Lenschow, Managing Director at Barclays]

Yeah. Okay. And then, Jay, one for Jay. Jay, if you think about the the optimization and what's going on there, is that people kind of doing more workloads in open source Kafka? Or, like because, like, if you think about the overall volume seem to be going higher.

[Raimo Lenschow, Managing Director at Barclays]

So so how do you optimize there? Can you just remind us remind us there?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Happening?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

No. So, yeah, it's not you know, we would characterize movements to open source. Yeah. That's effectively churn. Right?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

It's not optimization. You know, customers are moving off your product. The no. You know, what do we mean by optimization? You know, you can try and take a lot of clusters that you have used across the company, combine them into bigger clusters, and try to get some efficiency there.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You can try and compress the data. You can try and optimize some of the usage patterns so it's more resource efficient. You you can also do something more contractual where you kinda really model out your growth and commit to something bigger in return for a larger discount. Like, all of those are the types of activities for customers that are, you know, looking to save. You know, it it was the case entering this year.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, last year had had a very heavy focus on consumption. We were probably riding a little bit lower in terms of the forward commitments of customers to their future growth. So, you know, one of the things that we have done over this year is kinda take up that commit coverage to more of the forward growth. That's basically a good thing. Like, you see it in the RPO growth, but it it does, you know, mean, know, somewhat higher discount.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You know, that's kind of the normal discount schedule as you commit more. You get a slightly better deal. And so that, you know, that that would contribute to that as well, which is more of a contractual rather than technical optimization.

[Raimo Lenschow, Managing Director at Barclays]

Yep. Okay. Perfect. Thanks.

[Shane Xie, VP - IR at Confluent]

Hey. Thanks, Raimo. We'll take our final question today from Rudy Kessinger with DA Davidson.

[Rudy Kessinger, MD & Senior Equity Research Analyst at D.A. Davidson]

Great. Thanks, guys. Peter sort of asked it earlier. Ron, close to 90% gross retention rate, just to put the skepticism to rest. Does that mean above or below 90%?

[Rohan Sivaram, CFO at Confluent]

It was marginally below 90%. Very marginally below 90%.

[Rudy Kessinger, MD & Senior Equity Research Analyst at D.A. Davidson]

Got it. Okay. And then, a lot of positive callouts on the DSP products, in particular, Flank, and some others. But, you know, with these with what you're kind of implying for the second half and kinda high teens implied cloud revenue growth, what what is core streaming cloud revenue growth growing at? Because we kinda back in and made some assumptions around Flink and some other products, and it would indicate it's growing, you know, a good a good chunk lower than the overall cloud revenue.

[Rudy Kessinger, MD & Senior Equity Research Analyst at D.A. Davidson]

So any color you can share on just what is the core streaming cloud revenue growing?

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Yeah. We, you know, we haven't broken it all out, but, you know, it is true. The, you know, the DSP portion of the business is outgrowing, you know, core streaming. I I would look at that streaming growth rate as kind of a combination of additional use cases, you know, growth, and then optimization. And, you know, it is the case that, you know, certainly for the last few quarters, we've had more of that type of optimization, especially for some of the larger accounts.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

You obviously don't see that on the DSP side where customers are building up new workloads. You know, there's not a big existing consumption base to go optimize.

[Shane Xie, VP - IR at Confluent]

Alright. Thanks, Rudy. This concludes our earnings call. Thanks again for joining us. Have a good evening, everyone.

[Jay Kreps, CEO, Co-Founder & Director at Confluent]

Thanks, everyone.

[Shane Xie, VP - IR at Confluent]

Thank you.

Participants

Executives

• Shane Xie, VP - IR
• Jay Kreps, CEO, Co-Founder & Director
• Rohan Sivaram, CFO

Analysts

• Matthew Hedberg, Software Analyst at RBC Capital Markets
• Brad Zelnick, Managing Director at Deutsche Bank
• Sanjit Singh, Executive Director at Morgan Stanley
• Peter Weed, Senior Analyst - SMID-Cap Software and Cybersecurity at Bernstein
• Jason Ader, Co-Group Head - Technology, Media & Communications at William Blair
• Gregg Moskowitz, MD & Senior Enterprise Software Analyst - Equity Research at Mizuho Financial Group, Inc.
• Derrick Wood, Managing Director at TD Cowen
• W. Miller Jump, Equity Research Associate at Truist Securities
• Mike Cikos, Senior Analyst at Needham & Company
• Raimo Lenschow, Managing Director at Barclays
• Rudy Kessinger, MD & Senior Equity Research Analyst at D.A. Davidson