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Confluent (NASDAQ:CFLT) Beats Q3 Sales Targets, Stock Jumps 16.2%


Full Report / November 02, 2022
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Data infrastructure software company, Confluent (NASDAQ:CFLT) announced better-than-expected results in the Q3 FY2022 quarter, with revenue up 47.9% year on year to $151.7 million. Guidance for next quarter's revenue was $162 million at the midpoint, which is 1.09% above the analyst consensus. Confluent made a GAAP loss of $116 million, down on its loss of $95.6 million, in the same quarter last year.

Confluent (CFLT) Q3 FY2022 Highlights:

  • Revenue: $151.7 million vs analyst estimates of $144.8 million (4.76% beat)
  • EPS (non-GAAP): -$0.13 vs analyst estimates of -$0.17
  • Revenue guidance for Q4 2022 is $162 million at the midpoint, above analyst estimates of $160.2 million
  • Free cash flow was negative $45.5 million, compared to negative free cash flow of $36.9 million in previous quarter
  • Customers: 921 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 64.9%, up from 63.7% same quarter last year

Started in 2014 by the team of engineers at LinkedIn who originally built it as an internal tool, Confluent (NASDAQ:CFLT) provides infrastructure software for organizations that makes it easy and fast to collect and move large amounts of data between different systems.

More and more data is being collected, a trend driven by both cheaper storage and more users, applications and systems being online. Most companies are capturing data about every single visit, click, input or a transaction made in their app or on their website, and some go even deeper. But as they accumulate more and more data, companies are confronted with the reality that gathering the data on its own isn’t really creating any value, and that it needs to be moved, processed and analyzed to be useful.

Confluent takes a massively popular open source data infrastructure software called Kafka, and provides it as a paid managed service. Kafka acts as a central transportation hub for the data, ingesting it from different sources (websites, mobile apps) and distributing it to all of the destinations it needs to get to (like analytical tools, databases, billing systems). The advantage of Kafka is that it moves the data in real time, which is becoming increasingly important, but is complex to implement and maintain which is where Confluent sees their opportunity.

Generating insights from system level data is an increasing priority for most businesses, but to do so requires connecting and analyzing piles of data stored and siloed in separate databases. This is the demand driver for cloud based data infrastructure software providers, who can more readily integrate, distribute and process information vs. legacy on-premise software providers.

Competitors in the data management space include Snowflake (NYSE:SNOW) as well as the services provided by cloud vendors such as Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Google Cloud (owned by Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG)). Confluent also competes with the self-managed, free version of Apache Kafka, the open-source software from which it was derived.

Sales Growth

As you can see below, Confluent's revenue growth has been exceptional over the last two years, growing from quarterly revenue of $61.4 million in Q3 FY2020, to $151.7 million.

Confluent Total Revenue

And unsurprisingly, this was another great quarter for Confluent with revenue up 47.9% year on year. Quarter on quarter the revenue increased by $12.3 million in Q3, which was in line with Q2 2022. This steady quarter-on-quarter growth shows the company is able to maintain a strong growth trajectory.

Guidance for the next quarter indicates Confluent is expecting revenue to grow 35% year on year to $162 million, slowing down from the 70.5% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 32% over the next twelve months.

Large Customers Growth

You can see below that at the end of the quarter Confluent reported 921 enterprise customers paying more than $100,000 annually, an increase of 64 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.

Confluent customers paying more than $100,000 annually

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Confluent's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 64.9% in Q3.

Confluent Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Cash Is King

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Confluent burned through $45.5 million in Q3, increasing the cash burn by 120% year on year.

Confluent Free Cash Flow

Confluent has burned through $167.6 million in cash over the last twelve months, a negative 31.2% free cash flow margin. This low FCF margin is a result of Confluent's need to still heavily invest in the business.

Key Takeaways from Confluent's Q3 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Confluent’s balance sheet, but we note that with a market capitalization of $7.25 billion and more than $1.93 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Confluent delivered this quarter. And we were also excited to see that it outperformed Wall St’s revenue expectations. Overall, this quarter's results seemed pretty positive and shareholders can feel optimistic. The company is up 16.2% on the results and currently trades at $25.98 per share.

Is Now The Time?

When considering Confluent, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We cheer for everyone who is making the lives of others easier through technology, but in case of Confluent we will be cheering from the sidelines. Its revenue growth has been exceptional, though we don't expect it to maintain historical growth rates. Unfortunately, its growth is coming at a cost of significant cash burn, and its customer acquisition is less efficient than many comparable companies.

Given its price to sales ratio based on the next twelve months is 8.9x, Confluent is priced with expectations of a long-term growth, and there's no doubt it is a bit of a market darling, at least for some. While we have no doubt one can find things to like about the company, we think there might be better opportunities in the market and at the moment don't see many reasons to get involved.

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