CFLT's Q1 earnings - Interesting points I no

Investment Analysis Clubs Saul’s Investing Discussions
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Please refer to their detailed earnings report and all the usual metrics here: https://investors.confluent.io/financial-information/quarter…

Key highlights that stood out to me (not an exhaustive list):

  1. RPO (future contracted revenues) rose to $551M (96% YOY and 10% QOQ).
  2. Non-US revenue grew 70% YOY to $47M.
  3. Customers bringing in more than $1M ARR grew to 97 (62% YOY).
  4. Total customers grew to 4120 (62% YOY and 19% QOQ).
  5. Overall DBNRR stayed strong at 130%.
  6. Cloud related DBNRR was at 150%
  7. Subscriptions revenue grew 68% YOY and 6% QOQ.
  8. Cloud revenue grew a whopping 179% YOY and 15% QOQ, accounting for more than 50% of all new contract signings.
  9. Confluent is increasingly being used as interconnectivity between different cloud providers like AWS, Azure and Google Cloud, enabling customers with a multi-cloud footprint to turn on and use a secure, fault-tolerant, real-time data pipeline that spans these environments.
  10. Institutional ownership is high at 75%.

Areas of concern:

  1. Deeply negative operating margin, EBITDA margin and net margin.
  2. Doubling of negative operating and free cash flow, which is likely seasonal due to their employee bonus program and stock purchase plan.
    PS. The market seems to be concerned about CFLT’s forward guidance. I think those concerns are overblown.

This is how I think of what CFLT does (highly over-simplified description):
Confluent allows a customer to quickly access and process data from their legacy databases, existing applications and customer facing platforms. As data is generated or received by the business, it passes through the CFLT platform which inspects the data, makes immediate business decisions based on the value of the data elements and then passes the data onto its final destination (usually a database). CFLT maintains a log of all such data streaming through for easy lookup and retrieval. This approach to “processing” data while it is still moving from one application to another helps businesses react to events and make decisions in real-time. And CFLT is able to handle multiple such data streams in parallel, essentially putting the business’ agility on steroids.

I love the premise of its product and its use cases because it allows companies to bridge their investments in legacy platforms to their multi-year migration paths towards digital and cloud based technologies.

As CEO, Jay Kreps puts it, “…our customers use Confluent as the unifying persistent bridge, enabling data to flow freely between the old legacy stack and new cloud applications wherever it resides, on-premise and in more than one cloud. This pattern of running Confluent to span environments is increasingly common, and Confluent is becoming a critical data fabric for enabling integration across multi-cloud and hybrid cloud environments.”

Migration to digital platforms and to the cloud are usually large, expensive, multi-year programs. CFLT allows customers to enable their “data in motion” while they are going down this migration path - thus bringing forward the value proposition and ROI onto top line growth and bottom line margins.

Beachman (@Iwannabeontheb2)

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I am surprised that the board chooses to discuss Upstart and Monday (the former of which, in hindsight, was the worst investing decision I ever made, and the latter not one I should have put money in despite its potential stellar performance) over Confluent.

The company’s technology and expertise are phenomenal. The growth is phenomenal.

It is being punished for being a comparable to Cloudflare, and for not generating profits. But keep in mind that Confluent is a younger public company than Datadog and Snowflake. Snowflake and Datadog have turned the corner on cash flow, Confluent will eventually get there in a few more quarters. But the market has swung decisively against loss-generating companies this year, which is why it was punished.

The cash position of the company is fine though. It has more than $1B in the bank. Even if it has more quarters of $100M+ losses (highly unlikely), it can weather the storm for two whole years.

I was surprised Confluent’s stock price tanked from $70 to $50 in February on what I thought were reasonably good earnings. I thought it was an incredible opportunity to double my position. It is now sitting in the $20s, and I am kicking myself for not having cash to buy more at these prices, because I would.

Besides the fact that Datadog and Snowflake are screaming buys right now, the only thing making me hesitate to buy more Confluent is the adoption speed and the flywheel runway for the underlying technology. As a software developer using some of the very products this board loves, I feel that Datadog and Snowflake’s products are fairly easy to start using (at least wading into the waters) and deliver great value to small companies and Fortune 500s alike. We use them at my small company. Confluent’s services, however, are rather specialized from my research. Not many startups or smaller companies will pick up using Apache Kafka in the way that they would start using Datadog’s services, Snowflakes analytics, or Cloudflare Workers, and they generally won’t need to.

I will keep an eye on Confluent once Datadog and Snowflake stop being bargains. With it trading at $5.4B, or 12-14x trailing twelve-month revenues, it is at incredibly attractive prices for a SaaS company in the cloud space. The RPO going up suggests an executing sales team and maybe future revenue beats. I just hope management will take the hint from the market and look to reduce the spending splurge quickly so I can get back to my cost basis.

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