Confluent, Inc. (CFLT) Q3 2025 Earnings Call Transcript

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Overview

The earnings call reflects strong growth in AI use cases and Flink, increased deal sizes, and positive momentum in cloud business despite some customer shifts. While management avoided some specifics, the overall sentiment from the Q&A is positive, emphasizing improved execution, strategic partnerships, and product traction. These factors, along with optimistic guidance, suggest a positive stock price movement.

Key Financial Performance

Q3 Subscription Revenue $286 million, grew 19% year-over-year. This growth was driven by strong consumption growth in the cloud business and deepening customer commitment.

Confluent Cloud Revenue $161 million, grew 24% year-over-year. The growth was attributed to stronger consumption across core streaming and DSP, including acceleration of new use cases moving into production.

Non-GAAP Operating Margin Approximately 10%, expanded by 3 percentage points year-over-year. This improvement was due to disciplined focus on driving efficient, sustainable growth.

Subscription Gross Margin 81.8%, above the long-term target threshold of 80%. This was achieved through improved sales and marketing leverage and streamlined coverage to drive growth.

Adjusted Free Cash Flow Margin 8.2%, increased by 450 basis points year-over-year. This was driven by revenue outperformance and improved operational efficiency.

Net Retention Rate (NRR) 114%, stabilized. This was supported by stronger consumption growth in the cloud business.

Revenue from the U.S. $172.1 million, grew 13% year-over-year. The growth was driven by healthy demand in financial services.

Revenue from outside the U.S. $126.4 million, grew 29% year-over-year. This growth was attributed to strong international demand.

$100,000+ ARR Customer Count 1,487, increased by 48 customers quarter-over-quarter, representing the largest sequential increase in 2 years. Growth was driven by new use case expansion and strong momentum in building the late-stage pipeline.

$1 Million+ ARR Customer Count 234, representing growth acceleration of 27%. This was driven by new use case expansion across cloud and platform.

Flink ARR for Confluent Cloud Grew more than 70% sequentially. This growth was driven by increased adoption of Flink across the customer base.

RPO Growth 43%, another quarter of acceleration. This was driven by customers committing to larger and longer-term deals.

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Operating Highlights

Flink ARR for Confluent Cloud: Grew more than 70% sequentially in Q3, with over 1,000 customers using Flink during the quarter. Flink enables real-time data processing and decision-making.

WarpStream: Marked its 1-year anniversary with 8x growth in consumption and multiple 6-figure deals closed with marquee customers.

Partner ecosystem: Partners sourced over 25% of new business in the last 12 months, up from 20% last quarter. Named MongoDB Partner of the Year and AWS launch partner for AI agents and tools category.

Geographical revenue growth: Revenue from outside the U.S. grew 29% to $126.4 million, while U.S. revenue grew 13% to $172.1 million.

Subscription revenue: Grew 19% to $286.3 million, representing 96% of total revenue. Cloud revenue grew 24% to $161 million, driven by stronger consumption and new use cases.

Operating margin: Increased 340 basis points to a record 9.7%, exceeding guidance by 270 basis points.

AI and data streaming: Positioned as a key player in providing real-time, AI-ready data. Over 100 AI-native customers, including 21 with $100,000+ ARR.

Customer expansion: Largest sequential net add in $100,000+ ARR customers in 2 years, with $1 million+ ARR customer count growing 27%.

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Risk or Challenges

Market Conditions: Economic uncertainties and market conditions could impact the company's financial performance and growth strategies, as highlighted in the forward-looking statements disclaimer.

Competitive Pressures: The company faces competition from CSP streaming offerings, although it maintains high win rates. Competitive pressures could impact market share and pricing.

Regulatory Hurdles: Potential regulatory risks are mentioned in the forward-looking statements disclaimer, which could affect operations and financial outcomes.

Supply Chain Disruptions: No explicit mention of supply chain disruptions in the transcript.

Economic Uncertainties: Economic uncertainties are acknowledged as a risk factor that could impact financial performance and strategic objectives.

Strategic Execution Risks: Challenges in scaling AI systems into production and ensuring reliable business systems powered by AI are highlighted as potential risks. Additionally, the need for effective field alignment and partner ecosystem expansion are critical for strategic execution.

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Guidance & Outlook

Subscription Revenue Guidance for Q4 2025: Expected to be in the range of $295.5 million to $296.5 million, representing growth of approximately 18%.

Non-GAAP Operating Margin Guidance for Q4 2025: Expected to be approximately 7%.

Non-GAAP Net Income per Diluted Share Guidance for Q4 2025: Expected to be in the range of $0.09 to $0.10.

Subscription Revenue Guidance for Fiscal Year 2025: Expected to be in the range of $1.1135 billion to $1.1145 billion, representing growth of approximately 21%.

Non-GAAP Operating Margin Guidance for Fiscal Year 2025: Expected to be approximately 7%.

Non-GAAP Net Income per Diluted Share Guidance for Fiscal Year 2025: Expected to be in the range of $0.39 to $0.40.

Adjusted Free Cash Flow Margin Guidance for Fiscal Year 2025: Expected to be approximately 6%.

Q4 Cloud Revenue Guidance: Expected to be approximately $165 million, representing growth of approximately 20% and accounting for approximately 56% of subscription revenue based on the midpoint of the guide.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:What are the learnings from the go-to-market changes made last quarter, and how should we think about the capacity to work with the incremental pipeline?

A:The specialization model for DSP has been effective in scaling new products. Improvements in field execution around consumption have driven progression in the consumption pipeline. The pipeline reflects customer workloads reaching production, which will drive future consumption. Management is confident in the pipeline and impressed by the go-to-market team's execution.

Q:Why or why shouldn't RPO and CRPO be considered reliable leading indicators for Confluent?

A:RPO is a leading indicator for Confluent Platform's organic growth. For Confluent Cloud, short-term drivers include new use cases moving into production, while long-term visibility is tied to RPO coverage to cloud revenue. The company has seen four consecutive quarters of accelerated RPO growth.

Q:When can we expect growth to bottom out given the multiple growth vectors in play?

A:Management is pleased with the strength in the cloud business and the Q4 guidance raise. Normalized for a specific customer impact, cloud growth rates show stability. Positive trends include GSP offerings like Flink reaching scale and improved field execution around consumption.

Q:Is there any cannibalistic effect from new offerings like WarpStream and enterprise on the core streaming business?

A:New offerings have proven to be a substantial tailwind. Deal sizes have increased as customers adopt bigger workloads and migrations. The architecture of these offerings is cost-effective, benefiting both customers and the company's gross margin.

Q:What is driving the 40% sequential growth in the late-stage pipeline, and what is the normal level of sequential growth?

A:The growth is driven by improvements in field motion around consumption and getting new use cases into production. Late-stage pipeline growth is used as an internal benchmark of execution. Management has not provided historical data for this metric but sees it as a forward-looking indicator.

Q:How is the early response to the launch of streaming agents on Confluent Cloud, and what is the customer readiness for this product?

A:Streaming agents have gained traction, with use cases already in production. The product simplifies development by allowing iterative testing with historical data before transitioning to real-time production. Management sees this as a critical part of the stack and a significant opportunity.

Q:What is the outlook for Flink, and how does it translate into the business?

A:Flink has shown strong growth since reaching GA, with over 1,000 paying customers and 12 customers spending over $100,000 in ARR. Management is optimistic about its potential, citing the large market for data processing and tools to help customers transition from batch to real-time processing.

Q:What drove the Q4 subscription guidance increase, and what are the key drivers for cloud business momentum?

A:The Q4 subscription guidance increase is driven by momentum in new use cases moving into production, normalized levels of optimization, and strength in Flink. Long-term visibility is supported by increasing RPO to cloud revenue coverage.

Q:What AI use cases involving Confluent are likely to move into production in the near term?

A:AI use cases include customer support, anomaly detection, and operational investigations across industries. These use cases require high data quality and real-time data flow, areas where Confluent is well-positioned.

Q:What is the impact of the large AI-native customer moving to self-hosted, and how does it affect Q4 cloud revenue?

A:The move will significantly reduce the customer's spend on Confluent Cloud, resulting in a low single-digit impact on Q4 cloud revenue. This impact has been incorporated into the Q4 guidance.

Q:What is the size of the CSP replacement opportunity, and why is it inflecting?

A:The CSP replacement opportunity is sizable, driven by improved TCO and DSP capabilities. Migration tools are being developed to make transitions easier, which is expected to accelerate the shift.

Q:How much of the Q3 performance is due to better sales execution versus macro tailwinds, including AI?

A:Management attributes the performance to structural improvements, new products, and better sales execution, though macro tailwinds may also have contributed.

Q:Did the U.S. Federal shutdown impact Q4 guidance?

A:The federal segment, which is a low single-digit percentage of total revenue, performed in line with expectations in Q3. A couple of federal deals are included in the Q4 guidance.

Q:What are the consumption trends month-over-month in Q3, and how did they contribute to the outperformance?

A:Month-over-month consumption growth rates improved sequentially, contributing to the Q3 outperformance. Management is pleased with the trends.

Q:Is the DSP specialization team fully built out, and what is its current status?

A:The DSP specialization team is fully built out and in full execution mode.

Q:What are the common patterns in how AI-native customers use Confluent?

A:AI-native customers use Confluent for real-time data flow, iterative testing, and real-time analytics. These use cases are similar to traditional machine learning but adapted for AI.

Q:What is the competitive landscape with Databricks' structured streaming product?

A:Confluent and Databricks remain complementary, serving different constituencies. Confluent focuses on real-time operational applications, while Databricks targets data engineers and analytics. Both companies continue to collaborate for joint customers.

Q:Review of Unclear Management Responses

A:Management avoided providing specific historical data for the late-stage pipeline growth metric and did not offer guidance for fiscal year '26 cloud revenue or net retention rates. Additionally, they deferred detailed announcements about streaming agents and AI-related products to an upcoming conference.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call indicates strong growth in key areas like subscription and cloud revenue, along with significant customer additions and DSP adoption. Flink's rapid growth and strategic initiatives like CSP takeouts and sales compensation alignment suggest a positive outlook. Despite some pressure on NRR and GRR, optimistic guidance and operational enhancements provide a positive sentiment, likely leading to a stock price increase over the next two weeks.

CFLT Slides

Confluent Q3 2025 slides: Cloud revenue growth hits 24% as margins expand

2025-10-27

CFLT Report

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