Confluent, Inc. Q2 FY2023 earnings

Confluent's second quarter of fiscal 2023 delivered revenue of $189.3 million, up 35.8% from the prior-year quarter, and $363.6 million for the six months ended June 30, 2023, up 36.9%. Confluent Cloud did the heavy lifting. Cloud revenue reached $84 million, up 78%, and cloud made up 44% of total revenue against 34% a year earlier. The mix inside subscription revenue moved the same way, with Confluent Platform and Confluent Cloud splitting it 53% and 47% versus 63% and 37% in the prior-year quarter. Services revenue grew 3%. Two facts frame the quarter: cloud is approaching half the business, and the self-managed platform still pays most of the bills.

Margins improved broadly. Gross profit rose 46.1% to $131.4 million and gross margin climbed 4.9 percentage points to 69.4%, helped by infrastructure efficiency and scale that offset the drag from a cloud-heavy revenue mix. The operating loss widened 1.8% to $119.4 million, but operating margin improved 21.1 percentage points to -63.1% because revenue grew much faster than the expense base. The GAAP net loss narrowed 12.1% to $103.4 million, and diluted loss per share improved by $0.07 to $0.35. Non-GAAP results show the same direction more sharply: a non-GAAP operating loss of $17.3 million that was $29.5 million better than a year earlier, a non-GAAP operating margin of negative 9.2% versus negative 33.5%, and non-GAAP net income per share of $0.00. Higher yields on marketable securities also lifted other income, net well above the prior-year level and flattered the bottom line.

Cash remains the soft spot. Operating cash flow was negative $29.1 million for the quarter, an improvement of 13.2%, but the six-month figure deteriorated 20.7% to negative $106.8 million. Capital expenditures were $0.8 million, down 31.7%. Free cash flow, defined as operating cash flow less capitalized internal-use software costs and capital expenditures, was negative $35.2 million, a $1.7 million improvement from the prior-year quarter, with a free cash flow margin of negative 18.6%. Backlog and commitments look healthier. Deferred revenue rose 14.8% to $328.0 million and remaining performance obligations rose 33.8% to $791.4 million. Confluent counted 1,144 customers with $100,000 or greater in ARR, up 33%, and roughly 4,830 total customers, up 17%. Dollar-based net retention held above 130%.

Guidance points to continued growth with margin discipline. For the third quarter of fiscal 2023, management guided revenue to $193.5 million to $195.5 million. For the full fiscal year 2023, revenue is guided to $767 million to $772 million. Non-GAAP operating margin is expected at roughly negative 10% for both the third quarter and the full fiscal year, and non-GAAP net loss per share is guided to $(0.01) to $0.00 for the third quarter and $(0.05) to $(0.02) for fiscal 2023. The company also repeated a target of non-GAAP operating margin breakeven exiting the fourth quarter of fiscal 2023.

The risk list is unchanged and worth restating. Confluent flags adverse and uncertain macroeconomic conditions, longer sales cycles, more scrutiny on IT budgets, reduced consumption of Confluent Cloud, customer preference for open source alternatives, and intensifying competition. It also depends on third-party cloud infrastructure to host Confluent Cloud. The cost cutting that began with a January 2023 workforce reduction carried into the quarter through restructuring and other related charges, and stock-based compensation remains the largest reconciling item between GAAP and non-GAAP results. The company also announced a CFO transition on the same day it reported: Rohan Sivaram replaces Steffan Tomlinson as Chief Financial Officer effective August 16.