Added YoY-growth column to customers table. StockNovice and others had some concerns related to customer growth last quarter. These numbers seems pretty solid to me!
I agree. I took a pretty large position in CFLT (not as large as my DDOG position, but larger than my NET position).
The sequential QoQ growth the last few quarters has been:
9.5%, 14.7%, 16.1%, 16.9%
This moves it into the 70.5% YoY growth. It is clearly accelerating. Moreover, they’re committed to averaging 130% NRR for the medium-term.
Was it a blowout like DDOG? Not really. Is the path to profitability as clear as DDOG? Not really. But I find it perplexing that the market decided to punish it with a 10% drop.
My current hypotheses on the reaction:
They reiterated that Confluent Cloud, in the near future, has “a lower gross margin profile than Confluent Platform.” (But this was known before, so why panic?)
They’re hiring. That affects their free cash flow and immediate profitability. So they’re telling analysts they’re not planning to get to profitability. (A growth company hiring? How shocking.)
They didn’t outperform other cloud stocks like DDOG and NET. (Well, ok. But that’s still the top echelon of all stocks).
If anything can point out something I’m missing, I’m all ears.
But as far as I see it, they merely pushed back profitability for maybe a few quarters in order to accelerate growth towards 70% YoY in their high-margin, ultra-sticky, SaaS offering. For DCF monkeys who just input those pieces to spit out a number, maybe that dramatically changes the value (especially in a rising-rate environment). But for those of us who know to look beyond simple excel models when it comes to valuing early-stage growth (which is what CFLT is), this is a buying opportunity.
My biggest concern with CFLT is Operating Income and Margin. Not only is the income getting lower the margin isn’t improving. I can stomach increasing losses as long as the percentage is improving. This is the 4th quarter in a row now that has only moved marginally.
Also, it wasn’t just flat guidance it was negative sequential guidance (-.75%).
To meet a proportional expectation from 2020 they would have to bring in $131.0 in revenue Q1, or about a 12% beat. Am I saying it’s out of the question, absolutely not! However, there is more to the story than revenue growth. Without a clear path to profitability, I am going to continue to monitor from the sidelines. There are plenty of positives which this thread has already touched on, I just wanted to add the main reason I am not pulling the trigger on this dip. To which, I could be wrong and in-fact I hope I am.
But I find it perplexing that the market decided to punish it with a 10% drop…If anything can point out something I’m missing, I’m all ears.
Ultimately, who knows why the market reacts the way it does? However, despite the improvement in customer numbers I see gross margin has now declined 4 straight quarters: 71.0%, 70.1%, 69.4%, 68.2%. I also notice losses and cash flows don’t seem to be improving at all.
You also have a company that told us a quarter or two ago to expect a flat patch since it didn’t invest properly during COVID. In my opinion, that’s led to the top line and customer strength being at least partially offset by a lack of leverage. We’ve seen companies like LVGO eventually prove leverage and take off. The flip side is we’ve seen companies like ESTC that never turn it around before growth drifts below hypergrowth. It’s possible a still skittish market isn’t entirely willing to give CFLT a pass on this with others showing better leverage at similar scale.
-Cloud revenue: + 27% QoQ and is now 28% of total revenue, up from 26% last quarter and 23% two quarters ago. Cloud revenue growth will possibly continue to decelerate to around 15% to 17% QoQ. It started with a high growth and that high growth is not sustainable in long term.
-Customer > 100k reacelerated with 10.54% QoQ but customer >1m ARR should contribute most to revenue since there are 88 of them. That’s minimum of 88m revenue contribution and it’s 88m/120m = 73% of total revenue minimum. and the 1m customer increased 25.71% QoQ.
-Operating cashflow(loss) / total revenue is decreasing over past 3 years although it ticked up slightly vs last quarter(2.5% more loss). It was -46% in 2019 and this quarter it’s at -19.9%. Confluent is still in the process of increasing economy of scale.
-Decline of gross margin is becuase Cloud revenue has lower margin due to it is still in early stage and has not reached scale and leverage. As Cloud continues to scale, management expect total gross margin around 70%. Total gross margin will decline to baseline of Cloud margin as Cloud revenue continues to grow faster than legacy platform revenue. Note legacy platform revenue is still growing at decent rate of 13.11% QoQ.
-I did notice they increased sales and marketing spending vs total revenue but it appears they limit it to 85% of total revenue. It decreased slightly vs last quarter. This increase in S&M spending contributed to increasing operating loss.
Conclusion:
It’s not all bad or all good.
Confluent is in early stage of growth. I believe as it scales, it’ll improve profitability. I see improvement in operating cashflow within next few quarters. I will continue to hold for now.(10% position)
-Customer > 100k reacelerated with 10.54% QoQ but customer >1m ARR should contribute most to revenue since there are 88 of them. That’s minimum of 88m revenue contribution and it’s 88m/120m = 73% of total revenue minimum. and the 1m customer increased 25.71% QoQ.
The denominator has to be TTM ARR, so somewhere around 88/360 = 22%.
Remember too that if last quarter a customer has previous 12 month ARR of $9,999,999 and spent 1 more dollar this year they would be a new million dollar ARR customer. That’s typical for all SaaS and the way they report customer metrics.