Confluent (CFLT)

Data streaming platform provider Confluent (NASDAQ:CFLT) reported revenue ahead of Wall Street’s expectations in Q3 CY2025, with sales up 19.3% year on year to $298.5 million. On the other hand, next quarter’s revenue guidance of $296 million was less impressive, coming in 3% below analysts’ estimates. Its non-GAAP profit of $0.13 per share was 33.6% above analysts’ consensus estimates.

Company Overview

Built by the original creators of Apache Kafka, the popular open-source messaging system, Confluent (NASDAQ:CFLT) provides a data infrastructure platform that enables organizations to connect their applications, systems, and data layers around real-time data streams.

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.

Confluent competes with cloud provider services like Amazon Managed Streaming for Apache Kafka, Microsoft's Azure Event Hubs, and Google Cloud Pub/Sub. On-premises competitors include Cloudera Dataflow, TIBCO Messaging, and Red Hat AMQ Streams.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, Confluent grew its sales at an exceptional 39% compounded annual growth rate. Its growth beat the average software company and shows its offerings resonate with customers, a helpful starting point for our analysis.

Long-term growth is the most important, but within software, a half-decade historical view may miss new innovations or demand cycles. Confluent’s annualized revenue growth of 23.3% over the last two years is below its five-year trend, but we still think the results suggest healthy demand.

This quarter, Confluent reported year-on-year revenue growth of 19.3%, and its $298.5 million of revenue exceeded Wall Street’s estimates by 2.1%. Company management is currently guiding for a 13.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 15.5% over the next 12 months, a deceleration versus the last two years. Despite the slowdown, this projection is above the sector average and suggests the market sees some success for its newer products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Confluent’s billings punched in at $318.1 million in Q3, and over the last four quarters, its growth was fantastic as it averaged 26.1% year-on-year increases. This alternate topline metric grew faster than total sales, meaning the company collects cash upfront and then recognizes the revenue over the length of its contracts - a boost for its liquidity and future revenue prospects.

This quarter, Confluent reported 1,487 enterprise customers paying more than $100,000 annually, an increase of 48 from the previous quarter. That’s fewer contract wins than last quarter and quite a bit below what we’ve observed over the previous year, suggesting its sales momentum with new enterprise customers is slowing. It also implies that Confluent will likely need to upsell its existing large customers or move down market to accelerate its top-line growth.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Confluent does a decent job acquiring new customers, and its CAC payback period checked in at 49.7 months this quarter. The company’s relatively fast recovery of its customer acquisition costs gives it the option to accelerate growth by increasing its sales and marketing investments.

What makes the software-as-a-service model so attractive is that once the software is developed, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Confluent’s gross margin is better than the broader software industry and signals it has solid unit economics and competitive products. As you can see below, it averaged a decent 74.1% gross margin over the last year. Said differently, Confluent paid its providers $25.86 for every $100 in revenue.

The market not only cares about gross margin levels but also how they change over time because expansion creates firepower for profitability and free cash generation. Confluent has seen gross margins improve by 5 percentage points over the last 2 year, which is elite in the software space.

In Q3, Confluent produced a 74.2% gross profit margin, in line with the same quarter last year. Zooming out, Confluent’s full-year margin has been trending up over the past 12 months, increasing by 1.1 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

Confluent’s expensive cost structure has contributed to an average operating margin of negative 34.7% over the last year. This happened because the company spent loads of money to capture market share. As seen in its fast revenue growth, the aggressive strategy has paid off so far, and Wall Street’s estimates suggest the party will continue. We tend to agree and believe the business has a good chance of reaching profitability upon scale.

Over the last two years, Confluent’s expanding sales gave it operating leverage as its margin rose by 8.7 percentage points. Still, it will take much more for the company to reach long-term profitability.

Confluent’s operating margin was negative 27.9% this quarter.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Confluent has shown poor cash profitability over the last year, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.8%, lousy for a software business.

Confluent’s free cash flow clocked in at $24.59 million in Q3, equivalent to a 8.2% margin. This result was good as its margin was 4.5 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Confluent’s cash conversion will improve. Their consensus estimates imply its free cash flow margin of 2.8% for the last 12 months will increase to 9.3%, giving it more flexibility for investments, share buybacks, and dividends.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Confluent is a well-capitalized company with $1.99 billion of cash and $1.11 billion of debt on its balance sheet. This $883.3 million net cash position is 11.6% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

Revenue, adjusted operating income, and adjusted EPS all beat expectations. It was also good to see Confluent provide EPS guidance for next quarter that slightly beat analysts’ expectations. On the other hand, its revenue guidance for next quarter fell short of Wall Street’s estimates. Overall, this quarter was mixed, but the market seems willing to forgive the revenue guidance. The stock traded up 8.8% to $24 immediately after reporting.

Updated: December 4, 2025 at 9:19 PM EST

Before deciding whether to buy Confluent or pass, we urge investors to consider business quality, valuation, and the latest quarterly results.

We think Confluent is a good business. To kick things off, its revenue growth was exceptional over the last five years. And while its operating margins reveal poor profitability compared to other software companies, its gross margin suggests it can generate sustainable profits.

Confluent’s price-to-sales ratio based on the next 12 months is 6.3x. Looking at the software space right now, Confluent trades at a compelling valuation. If you trust the business and its direction, this is an ideal time to buy.

Wall Street analysts have a consensus one-year price target of $27.87 on the company (compared to the current share price of $23.40), implying they see 19.1% upside in buying Confluent in the short term.