Confluent - why I decided not to buy now

[SaulR80683]

The website was very slick and well done. Then I read a long writeup on Confluent by muji from some time ago, and also read the thread on the board after results. I started out gungho about it, and finished up, after I also read the results and listened to the conference call, with a let’s wait and see feeling.

First, muji really likes Kafka but isn’t sure that people will pay Confluent for it as it’s open source.

Second, it’s an open source company like Elastic, and we have always drifted away from those because of all the complications involved, and the question of who is more important to the company, the open source developers or the stockholders. And because the companies with their origins in open source have almost seemed to feel that making money from it was secondary, was almost being disloyal to their origins, and finally because AWS and others almost always try to copy their open source software. A more complicated picture.

Third, importantly, as Stocknovice pointed out, acquiring new customers seems to be declining fairly rapidly the last two quarters.

Fourth, the CEO seemed to be a salesman to a ridiculous degree. Every time he was asked a question he responded “Oh yes, we can do that/ that’s good for our business, etc” Set my teeth on edge.

Fifth, their NRR is supposed to be over 30%. Their total revenue is growing at 67%, their platform business is growing at 40%, their cloud business is growing at 200% plus, even their service revenue is growing at 45%…. And they forecast 35% growth next year!!! Think about that! Forecasting 35% for next year when you are growing at 67% right now!!! Just their NRR would cover that with no new business at all. Yes, I’ve heard of sandbagging, but that is SOOOOOO… ridiculous that they must be feeling very insecure.

Sixth, and on top of that they forecast flat revenue between their fourth and first quarters this year. Zero sequential growth!!! They must be really anticipating a slowdown.

I decided not to buy. I have enough companies that I really like and that don’t have all these questions.

Best,

Saul

[MovedOn]

Hi Saul,

i did some research on Confluent.
My answers to some of your concerns:

#1. IT companies with internal develop teams probably won’t use Confluent. They will use existing resources to config their version of Kafka. Non-IT companies, e.g but not limited to: financials, retailers, automotive companies will probably use Confluent platform and Confluent Cloud. They don’t want to setup a new develop team to maintain Kafaka. Judging the hyper growth in Concluent Cloud revenue, companies are migrating to Naitive cloud from on-premise.

#2. Confluent employees are majoir contributors to the open source project. They are rooted toward success of Confluent. Opensource version can act as a freemium model. It gathers a huge customers base and spill over to the commercial version which provides more features and fully managed naitive cloud offering.

“The trio (Confluent founders) received strong support from the developer community as well as from higher-ups at LinkedIn who ultimately invested in the startup. Ever since Kafka and Confluent have been closely linked since inception with Confluent developers being the main contributors to the Kafka open source project.” -publiccomps

Kafka is getting more and more popular:
The Rise and Rise of Apache Kafka:
https://redmonk.com/fryan/2016/02/04/the-rise-and-rise-of-ap…

Threat from Amazon and other third party providers:

Confluent founders created Kafka . They are the authoirty figures in eyes of Kafka users.
There is a difference between Confluent Cloud and Amazon MSK. Confluent cloud is cloud naitive. Amazon MSK is cloud hosted.

Here are two explainations of the difference:

http://www.confluent.io/confluent-cloud-vs-amazon-msk/
http://www.nojitter.com/cloud-communications/cloud-native-vs…

#3: There’s seasonality to customer growth, 1 or 2 quarters won’t tell us long term growth. This is simliary to MongoDB. Their customer growth rate was all over the place. I estimate Confluent is at a growth stage where MongoDB was few years ago.

See MongoDB erratic customer growth rate. I believe open source project can grow for long term because it’s being constantly updated.

Ended date Customer > 100k QoQ sequential growth
7/31/2021 8.21%
4/30/2021 8.06%
1/31/2021 9.73%
10/31/2020 11.88%
7/31/2020 9.78%
4/30/2020 8.24%
1/31/2020 6.92%
10/31/2019 6.00%
7/31/2019 5.63%
4/30/2019 5.97%

#5 Same answer as #6

#6 I believe there’s big sangbagging due to seasonality of their business. They give low guidance to be safe. Aug 05, 2021, they reported 88m revenue and gave $89-$91 million guidance for next quarter. That’s almost flat growth (1% growth). The actual revenue for next quarter ended up being $103m! A 16% beat of their low guidance. So the stock sky rocketed 27%! Even the Cloud revenue is growing rapidly. They don’t want to over estimate and then seasonality hit and have a “miss the guidance” in the news like you said in the Knowledge base.

DDOG,CRWD etc are doing great but the question is: at what stage of their growth is at?

I am not saying go all in and buy Confluent now. The stock is very expensive and can pull back in the short term.

(Long CFLT with 8%.)

[MFChips]

To expand on this from above:

#1. IT companies with internal develop teams probably won’t use Confluent. They will use existing resources to config their version of Kafka. Non-IT companies, e.g but not limited to: financials, retailers, automotive companies will probably use Confluent platform and Confluent Cloud. They don’t want to setup a new develop team to maintain Kafaka. Judging the hyper growth in Concluent Cloud revenue, companies are migrating to Naitive cloud from on-premise.

Non-IT companies just can’t find competent resources to do these things (increasingly). My good friend manages a SW development company for a major Energy Provider in the west and he has recently presented to senior management that there is no way they can compete for talent vs the Software companies themselves, who now, with WFH, are hiring up their talent in places outside of Silicon Valley and such. So where his company used to offer a nice secure job in an affordable living region that people like to settle down in, they can now work for companies such as Confluent or Datadog from wherever. He feels they will have to rely on highly paid independent contractors thru Fiverr type agencies going forward, essentially hiring high-end experts. As well, they will be doing much less development in house going forward - they cannot possibly attract the talent.

He plans to retire early in March and will immediately put his Database skillset up for hire while working in lots of travel between jobs.

[MCVMe]

If you want to run Kafka (or have to run Kafka), there are a few ways to do it:

1. You can put Kafka open source on a cloud platform such as AWS, Google, or Azure. In this case, the Kafka itself is free, but you have to pay the platform provider. If you want support, then you need to find a contract house that provides support. You then pay that contract house. Confluent will not provide support for this configuration, and they have the people who built Kafka. So you might feel a bit lonely if you don’t have access to experts.

2. You can purchase Confluent Platform, which is basically Kafka OSS plus utilities for management. You then run that on a cloud platform. Confluent will sell you support for this configuration. You pay for Confluent Platform, for support, and for the cloud platform supplier (e.g., AWS).

3. You can use Confluent Cloud. In this case, you pay Confluent for the entire SaaS service, which essentially bundles the app (whatever they have done to Kafka) and the cloud platform. You do not directly pay a cloud platform supplier — it comes with Confluent Cloud. Confluent cloud has a bunch of management utilities too, and you can get support.

Confluent claims that for most enterprises, option 3 (Confluent cloud) costs 20% or 30% less as a package than option 1. If that’s true, then moving from open source Kafka on a cloud platform (option 1) to Confluent Cloud actually saves you money, plus you get support. That’s quite an attractive plan, especially if you don’t really understand Kafka.

The argument for why this is would seem to be economies of scale. Confluent Cloud is actually running on the same cloud platforms you would have purchased. Since Confluent is not making money yet, it may be that they are buying customers this way. Whatever the reason, it’s an important factor in looking at how Confluent can grow.

I have been through this decision process, but just for one potential customer of Confluent. I do not know if it generalizes.

Long Confluent at 2% starting position.

[RafesUserName]

@MCVMe, don’t forget:
4) Self-hosted on-premises for free.

Also, in-house people can support it. A company does not have to pay for support. I keep wondering about this aspect. If you have a team technical enough to take advantage of Kafka, I wonder how much more you really need to keep it running.

[Smorgasbord1]

Second, it’s an open source company like Elastic, and we have always drifted away from those because of all the complications involved, and the question of who is more important to the company, the open source developers or the stockholders. And because the companies with their origins in open source have almost seemed to feel that making money from it was secondary, was almost being disloyal to their origins, and finally because AWS and others almost always try to copy their open source software. A more complicated picture.

Perhaps the question is whether Confluent is more like Elastic or more like MongoDB. MongoDB was losing business to other open source derived versions, like Amazon’s DocumentDB, and then made a change to the Open Source license that essentially prohibited companies like Amazon from hosting newer versions of the Open Source for customers. That was controversial at the time, but the end result - combined with MongoDB offering its own Atlas hosted service (and putting a lot of effort into it) - was that MongoDB turned out to be a great investment after many here (including myself) sold out.

Elastic, OTOH, didn’t figure out how to navigate those waters and hasn’t done nearly as well.

I don’t know if Confluent is more like Elastic or more like MongoDB, but just being Open Source isn’t necessarily a bad thing if the company is smart about it.