Another look at Confluent (CFLT)

I believe Confluent presents a really strong investment opportunity. Their fourth quarter earnings had Confluent Cloud growing at 102% and operating margin improved 20 percentage points year over year.

Overall revenue grew just 41%, because their legacy platform for on premise solutions grew 17% and accounts for 52% of business. This legacy platform has a high NRR but isn’t expected to grow as much. I’ll explain later a bit more why this is unconcerning and why the focus should be on the Confluent Cloud side of the business.

The full year numbers came in strong as well, +51% yoy revenue growth to 586M. Confluent Cloud grew 124% to 211M with “substantially improved unit economics”.

The market cap for Confluent is only 6.85B, but they have 1.93B in cash on their balance sheet giving them about 28.2% of their market cap as cash. Price/sales ratio is 11.74x making it attractive on a valuation basis.

The most interesting part about this company is the number of extremely large customers that are growing. There are a number of 10M+ revenue customers and they expect to have a 20M+ revenue customers soon. This is a consumption based model similar to Snowflake where more data streamed equates to higher revenue. Here’s a passage from their earnings call on these large customers:

We also had a record quarter of customers with $1 million or more in ARR, adding 20 customers during the quarter, an all-time high, bringing the total to 133 customers, up 51%. And we ended FY '22 more than doubling our $5 million-plus ARR customers from a year ago, including a growing number of $10 million plus ARR customers.

Recently Confluent cut 8% of their workforce which they say pulls their target of getting to adjusted operating margin of breakeven by 12 months.

Circling back to what Confluent does, they are a data streaming platform for enterprise Kafka. Kafka is an open source tool for different applications to send data back and forth to each other. The business model is similar to MongoDB where it’s an enterprise version of open source software.

In practical terms it takes more work and resources for a company to manage Kafka which is more difficult then it is to just use Confluent which is a fully managed solution. Confluent is a vastly better solution to the point where it’s a poor business decision to self manage Kafka, and the Confluent solution shows a large ROI immediately.

Enterprise level of Kafka is really only needed by larger companies though and this is something to keep in mind. This is why they only have 4,530 customers and 100k+ customers make up 85% of revenue. The reason for this being smaller companies will usually have their engineers connecting to the same databases to access data and not need to stream it to other locations and apps as much. However, at larger organizations the need becomes much greater to share or stream data across business lines and different software architectures.

Their legacy business, Confluent Platform, is only growing at 17% of revenue. This offering is not as needed as much now that many companies are moving to Cloud solutions. It’s an on premise solution for streaming data out of and into company data centers. This has the advantage of not needing to migrate data to the cloud right away which is a challenging process, instead the data can be streamed to another location.

Most of the Confluent Platform customers are also Confluent Cloud customers. They call these customers “hybrid” who use both services and this is the fastest growing segment of the business and shows the value Confluent provides.

Recently Confluent acquired this company called Flink which does stream processing as Confluent estimates the TAM for this product could be as large as Confluent Cloud.

One other interesting piece from their earnings call is they mention that Q4 deals got pushed to 2023. This could mean that Q1 has an earnings surprise upwards and I’ll be looking to confirm this in their upcoming report.

Here’s what they said on the call: We saw less urgency by customers to sign deals in the last couple weeks than we typically would see in a calendar Q4 primarily in our enterprise business as some customers evaluated macro and opted to delay their purchases to FY23.

For another excellent opinion on this company Software Stack Investing had a write up Confluent as well: [Looping Back on Confluent (CFLT) - Software Stack Investing](https://Software Stack Investing Confluent Article)

One really well thought out point from SSI is that Confluent maintained their guidance in the face of macro uncertainty while most other consumption based SaaS companies lowered. Confluent was one of the first ones reporting in the season, so the market gave them a tepid response to their earnings call. If they had reported later and held guidance they likely would have seen a rally in the price.


wpr101 - I have also taken another look at Confluence, and I agree with many of the positives that you raise.

My “bullish case” for Confluent is the combination of the following factors:

  • Decent top-line growth (~40% YoY, expected to stabilize in the mid-30%'s in subsequent quarters
  • Its key product (Confluent Cloud) still growing high (102% YoY) and becoming a higher share of total revenue (41% compared to 28% in Q4’22)

  • A relatively small revenue base (~$700ARR), allowing for the possibility of acceleration before law of large numbers hits

  • A commitment towards profitability, with an indication of + non-gaap OpMargin by Q4’23 (from -22% in Q4’22)

So, to your point, there’s definitely room for excitement if this scenario plays out - especially at its current valuation.

However, there are some amber flags that I’m closely paying attention to:
(1) While revenue growth hasn’t slowed as rapidly as other usage-based companies as you indicated, there is definite weakness showing up on forward indicators:

  • RPO has slowed to 48% YoY after growing at 91% Q4’22
  • Customer growth shows a similar pattern, with way less “paying customers” added in '23 than '22

(2) There have been compelling arguments made by @PaulWBryant , @stocknovice , @wsm007 and others regarding the cannibalization of revenue from Confluent Cloud to its Platform revenue, and the dependence on large customers to fuel its growth. In my opinion, these concerns are still valid - and with the added complication of today’s macro environment, I don’t think these questions will become apparent anytime soon

Confluent (CFLT) Result - Investment Analysis Clubs / Saul’s Investing Discussions - Motley Fool Community

(3) Lastly, while I can definitely see the growth in “data streaming” long term, the hyperscalers do offer similar tools to resolve use cases applicable for Confluent (i.e., AWS Kinesis). The techies here may rightfully correct me that these are not the same products; however, I have witnessed my client choose the hyperscalers’ products over Confluent. Adding the fact that Kafka is an open-source product, the “business imperative” for continued growth in this difficult environment becomes cloudy to me.

Oh, and for anyone that cares about the most contentious metric (SBC), it’s at 45% of revenue.

Closely monitoring,


Earnings were just released and looks like a modest beat on all metrics. The transcript reads good overall, sounds like they are seeing strong demand despite macro conditions.

Revenue 174M (guided 167M)
Sequential cloud revenue add 5.3M (guided 5M)
Adj operating margin -23% (guided -27%)
Adj net loss/share -0.09 (guided -0.15 to -0.13)

For the full year they guided,

Revenue 760M-765M (same as previous guide)
Adj operating margin -14% to -13% (previously -15% to -14%)
Adj net loss/share -.20 to -.14 (previously -0.28 to -0.22)

They said on the call they didn’t flow through this quarter’s over performance to the full year revenue guide because they are being prudent.

The CEOs remarks focused almost 100% on their product and superior total cost of ownership compared to open source. I think they are trying to still trying to get their product and business model understood by investors.

A few positive comments stood out to me:

  • current RPO accelerated from last Q
  • April had a nice bounce back on consumption
  • Generative AI “absolutely an accelerator”
  • Assuming no macro improvements in guidance

A worrying point for me is that Confluent seems to be hitting a growth wall. It’s particularly concerning given its low revenue base.

Let’s look at “net new ARR” generation in a TTM format to normalize quarterly ebbs & flows…

Q1 Q2 Q3 Q4
2021 $26.1 $34.4 $41.1 $49.6
2022 $49.1 $51.1 $49.1 $48.8
2023 $48.2

You can see that there’s been basically no progress in five consecutive quarters. Tough to decipher how much can be attributed to macro vs. their business, but worth monitoring.

It would be less worrying if land and expand were showing some progress, but that’s not happening either. Had they not changed their NRR calculation, it would have 124% (down from 129% the previous quarter, and a consistent >130% before that). Similarly, new-logos are growing moderately.

I get that at a market cap of ~$7B, Confluent could be a nice candidate to experience re-acceleration, but a lot of things have to happen for it to get there. The lever being pulled to speed profitability is trimming expenses (OpEx only 19% growth YoY). That can only help to a point though. I’m curious how others are thinking about this…



I ended up closing my Confluent position after looking at some graphs on Public Comps. I compared them to Monday and SentinelOne and it doesn’t look nearly as favorable I had expected.

EV over next twelve months revenue is basically the same for all three. However, when comparing cash flows, Confluent is comparing much worse. Combined with the lower revenue growth I can’t see owning it especially over Monday. I increased my position in Monday after examining these graphs below.


I think it’s worth noting that CFLT’s current FCF margin in the most recent ER was minus 48% not minus 75%. And they are guiding to be roughly at breakeven by Q4 of this year which also lines up with being breakeven on adj operating margin.

From the call:

Free cash flow margin declined one percentage point to negative 47.5%. As expected and discussed on our last earnings call, free cash flow in Q1 was negatively impacted by charges related to our restructuring, the Immerok acquisition, ESPP and our corporate bonus payout.

Additionally, for Q4 23, we expect to deliver 48% to 50% of total revenue from cloud and achieve breakeven for non-GAAP operating margin. The timing for free cash flow breakeven will roughly mirror that of our operating margin.

Also, SentinelOne’s YoY revenue growth rate is likely going to drop into the 40’s when they report Q2 of this year and lap the acquisition + come up against tough comps.