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Confluent delivers strong Q3 2023, but investors cool on narrower full-year guidance

Derek du Preez Profile picture for user ddpreez November 2, 2023
Summary:
By almost all measures, data streaming vendor Confluent has had an excellent year. But as is the way with expectations, investors judge harshly.

An image of Jay Kreps, Confluent CEO, on stage
(Jay Kreps)

Confluent - the company that provides a commercial offering of Apache Kafka and is spearheading data streaming in the enterprise - has had another very solid quarter, beating its revenue and bottom line guidance. The vendor has had a very successful year, in particular when looking at its cloud revenue and the growth of its larger deals, but investors have been cool on the company’s latest, narrower full year guidance - sending its share price down in after hours trading yesterday. 

However, by almost all other metrics, Confluent’s Q3 2023 numbers were strong and the long-term prospects all seem to be pointing in the right direction. The key figures for the quarter include: 

  • Third quarter revenue of $200 million, up 32% year over year

  • Third quarter Confluent Cloud revenue of $92 million, up 61% year over year

  • Remaining performance obligations of $824 million, up 24% year over year

  • 1,185 customers with $100,000 or greater in ARR, up 25% year over year

  • 120 net new customers in the quarter, bringing the total to approximately 4,240 customers - up 40%

  • Customers with $1 million or more in ARR grew 53% to 113

CEO Jay Kreps commented on the numbers and said: 

Despite the pressure from a more difficult macroeconomic backdrop, we think these strong and consistent results are a testament to our ability to drive durable and efficient growth.

The rise of data streaming is one of the most fundamental shifts in the world of data. So, it will be hard to imagine a time when companies didn't have ubiquitous access to real-time data and the ability to react to it instantaneously.

Apache Kafka has emerged as the de facto standard of this movement, hundreds of thousands of organizations including more than 75% of the Fortune 500 use it every day for critical use cases across their business.

Despite the strong numbers, Confluent issued guidance that full year sales would be between $768-769 million, compared to a previous view of $767-772 million. The slightly narrower focus seems to have resulted in a cooler view from investors, with the vendor’s share price down 25% yesterday. 

However, as diginomica has highlighted a number of times of the years, investors’ quarterly thinking can be unhelpful when assessing the long-term validity of a company - and Kreps believes that Confluent is leading in an untapped market. He said: 

We've seen fantastic momentum to date but what's most exciting is our approximately $60 billion market opportunity in front of us. We've started to demonstrate both the breadth and depth of this opportunity. 

The breadth is captured by the massive adoption of Kafka, which provides a large installed base for new customer acquisition through self-service on Confluent Cloud. This is foundational to our strategy of converting open source users and landing greenfield customers in high volume.

Customer examples

Turning to customer stories, Kreps highlighted two that were of particular interest. First up was Armis, an asset intelligence platform focused on cybersecurity, which tracks over 3 billion devices for its customers, ranging from printers and laptops to connected medical devices. Kreps said: 

Kafka is a central part of their business responsible for ingesting data bidirectionally from billions of devices to provide real-time protection and policy enforcement. But with the rapid growth of its business and the proliferation of connected devices the cost and overhead of managing open source Kafka was unwieldy

This quarter Armis turned to Confluent Cloud for a cloud-native Kafka service that can scale alongside its business. Confluent will be the central nervous system for Armis' data streaming platform managing data from billions of devices in real time, all while enabling them to reassign 70% of the expensive engineering talent previously focused on Kafka to projects that move the needle for the business.

Secondly, Kreps was keen to highlight how Confluent often lands in a company with a relatively small deal, but once it has proven value, can expand rapidly. One of the vendor’s largest customers is a job website, which now sends more than 4.5 gigabytes per second through Confluent Cloud every day. The commercial relationship between the two started in 2020 for a single use case in one business unit. However, this has since grown significantly, as Kreps said: 

As that pilot proved successful, we landed a $1 million-plus deal that expanded Confluent Cloud to more business units across the company. Inspired by our platform's extensive capabilities and an accelerated move to the cloud our customers reimagined their data architecture in 2021, leading to our first multimillion dollar deal with this customer.

As Confluent became a critical unified data layer across the organization, their annual spend surpassed $8 million. As you can see, what often starts as a small land for a single use case can rapidly expand to a large customer in just two years' time. But we believe we are still at the beginning of a great partnership as use cases and streaming data become more pervasive throughout the organization.

My take

As always, focus on the metrics that matter over the long term. Cloud revenue and size of customer deals are good indicators of where a company is likely headed - and Confluent is doing well on both these points. Not to mention that its recent product announcements align well with the AI investment in the market. It still has work to do, however, in simplifying the use of data streaming across the enterprise and communicating use cases effectively to a broader audience - but as we saw at its recent user event, that’s improving too. The macro environment through 2024 still looks challenging, but steady as she goes. 

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