We're just delighted to have Confluent joining us for a Fireside Chat. They're also doing one-on-ones. Steffan to my left is the CFO, and Rohan is the SVP of Finance. When I checked this morning, the stock was between $25 and $26. We have a $33 price target, $8 billion market cap, trading at 7x revenue, grew 51% last year, right? Mm-hmm. You know. We have it at 30% growth this year, which I'm guessing is the midpoint of your guidance. Burned $172 million in 2022. We're gonna talk about that, right? Because the multiple would be higher otherwise. We have you burning $90 million in 2023, cash flow positive sometime in 2024. Did I just do that, or did you guys tell us cash flow positive sometime in 2024? You did that. I just did that. Okay. Let's start, we'll start at the top. How's business? What would you say? By the way, for some context, I had Atlassian here yesterday in the very uncomfortable position, hopefully you've never had this happen, where they announced a layoff right after the close, you know, that's just tough situation to be in, right? It's hard to get that right. When we asked, you know, "How's business?" The answer was, "We continue to be challenged in the short term. We're really bullish in the long term. There's two areas where we're challenged." How's business? What would you say? I'd say it's resilient. Yeah. Okay. It speaks to the secular trend that we're seeing across every industry, which is data needs to be put in motion, and Kafka and Confluent is really the solution. That doesn't mean to say that there aren't near-term call it, you know, challenges that we've worked through. We've been public since June of 2021. Every quarter that we've been public, we've been delivering on our commitments in a tough environment. We've been appropriately course-correcting along the way. I would say the signal remains very strong relative to not only our existing customer base but the prospective customer base around the need for data streaming, data streaming platform. I'm sure we'll get into this, but the recent acquisition that we did of Immerok, gets us into the open source project Flink, which is about stream processing and application streaming, and that will be another leg of growth for us out in the future. We'll get to that last. All right, first of all, just for the benefit of the audience, what are we talking about here? What is streaming? What is Kafka? How does Confluent fit in? Just very big picture. Big picture, you think of Kafka and Confluent as the connective tissue that connects databases and applications in order to have data be transferred in real time, stored in real time, processed in real time. That is completely different. It's a completely different paradigm than the legacy solutions that are out there that were doing ETL and other, call it, you know, the TIBCOs of the world, et cetera. Those are all good companies, but those companies were unable to deliver on the vision of having a real-time streaming architecture. What does that mean? Well, a real-time streaming architecture enables every company in every industry to run their business in real time. Think of a retailer who has both brick-and-mortar and also an e-commerce platform. In order to have their point-of-sale system connect to their inventory management system to connect to personalized promotions, the batch processing paradigm that used to exist, that people would try to run their business at the end of the day or end of the week to make decisions, that just doesn't work anymore. In this day and age, having all of the data flowing in between systems and applications enables companies to make better decisions to run their businesses more profitably, to serve their customers better, and ultimately enables commerce to run faster. Yeah. And more efficiently. We could go through each different vertical, if you think about taking a step back, even the thematic things that you're hearing about today, machine learning, AI, generative AI, these are things that have been core drivers of our business even from, you know, day one when Jay and Jun and Neha created the company. Yeah. Those are also thematic themes that will be helping having put more data in motion and that will accrue to our benefit. Yeah. Let's do a couple of the use cases. The one that cracks me up, do you remember that show on HBO, 100 Foot Wave? Did you ever see that? I did see it. Did you? Yeah. I forget when it came out. It came out, like, a year ago, right? Yeah. I was on vacation in Italy with my wife, right. Mm-hmm. Our son's like, "You gotta watch," he's a surfer, so he's like, "You gotta watch 100 Foot Wave." Great. We subscribe to Xfinity, I'm like, well, I'm just gonna, whatever the right word is, enable HBO through my Xfinity. We're in Italy. I go into Xfinity, right? I click, I want HBO, right? I immediately wanna be able to launch the HBO app and watch 100 Foot Wave, right? It worked, which is incredible. We did a customer call with HBO. Yeah. Right? I gave him that example. He goes, "You know why that worked, Pat, right? The only reason that worked is because all the stuff that we've been doing with Confluent, but also with some different databases too. Okay. It's been a huge investment on our part to make it so that'll work. It's not just for the use case you described, but it's really important for advertising. Yeah. To be able to deliver advertising at the right moment in response to. So th ere's like a media example. Give us like a financial services example 'cause, you know, we're owned by Citizens Bank now. Financial services, first off, very meaningful industry to us. They were an early adopter of Confluent Platform, actually. The use case there started with fraud detection, real-time fraud detection that needs to happen in real time. That fraud detection use case was a great entry point for us. Then we saw multiple different departments of large banks adopt us, from private wealth management to equity capital markets, real-time trading, inflow analysis, balance sheet management. The list goes on, and but it was the fraud detection piece that was the entry point into many of the largest banks that are out there. Okay. Did you talk to us while you were here? Yeah. You did? Of course. Okay, good. Yeah. Is there something we can do with you? We're starting, right? Yeah. Yeah. Okay. Absolutely. Okay. Okay. All right. The real question is, why has the stock not already worked better? Okay? We're just gonna tick through some of the bear cases. While I was sitting up here, when you came up, I asked Cody, "What's the bear?" It's like, what's the bear case? One investor is like, "Just too expensive, and they're burning too much money." What would you say? I would say that we're an eight-year-old company, and we're looking at balancing growth and profitability. We are of a younger vintage than some of our peer group companies that are out there that have been around 10, 12, 15, 17 years. We've been all about managing growth and profitability. We've not been about growth at all costs. The level of investment that we've made to date, is reflective of the decisions we've made on the product side of the house. There are very few companies, especially who are eight years old, that had started with an on-prem offering and then added a cloud offering. In fact, if you were to read any business 101 book, they were like, "Hey, don't divide up your resources and try to do two things at once, especially if you're a small company." I give the founding team of Confluent so much credit for the courage it took to take what was Confluent Platform, which was an incredibly robust business, and it still is. To add Confluent Cloud to be on all three cloud service providers, to do that. Mm. because the recognition is you have to be wherever the data and applications reside. That means on-prem and in the cloud. That level of investment is meaningful and significant. Because we've made that decision, the level of investment over this past eight years has been significant, but what we've been able to do, Pat, is over the last year and a half as a public company, we've been delivering high growth and improving profitability. In fact, in Q4, we just delivered record revenue growth in a 20 point operating margin improvement year-over-year. We went through the difficult decision around restructuring and doing a reduction in force, not because we were in a position of weakness. It's quite the opposite. We're in the position of strength. We have forever capital, but we decided to pull in profitability by a full year because the unit economics support it. If you look at our cloud gross margins, our LTV to CAC, the productivity, we have a very large opportunity in front of us, we pulled in profitability by a full year while still maintaining a 30% growth rate. By the end of this year, I know you started out with this around the free cash flow being positive for the full year for FY 2024, operating margin and free cash flow will trend directionally together. Okay. By the time we get to operating margin break even in Q4 of this year, free cash flow will be very close to that as well. As you're coming into this, you guys obviously had a lot of conversations about where do we wanna be, right? Yep. What were the arguments on both sides, and how did you end up at, okay, we're gonna be profitable in Q4? Yeah. I'm guessing this is not heat is the wrong word. No. I'm guessing this is a pretty intense discussion. Yeah, it was a very thoughtful discussion. Yeah. We looked at all the different angles around it. To us, we're playing in a $60 billion market today. Mm-hmm. We are lightly penetrated in it, so we wanna make sure that we are all about setting ourselves up to capture that market share, but having efficient growth. This efficient growth, especially in this environment where interest rates are up, economic uncertainty is higher than it's been in a very long time, we felt like it was prudent that we could go through the process of right-sizing our business to get fit to really attack the market going forward. You know this, but maybe some others don't. We doubled our headcount in the last two years. We were able to double the headcount, provide, really still healthy growth rates and improve profitability, but we felt we could do more. In this environment, we felt like getting to cash flow positive and operating margin break even was the right thing to do, and we're doing that while still preserving our ability to grow at very healthy rates on a long-term basis. Yeah. Did you hear Emily Chang from Bloomberg's interview with Marc Benioff right after? No, I didn't. It's really good. There's a lot of these kinds of interviews. Normally I wouldn't, but this one's really, really good because she won't let him off the hook, right? She's like, "You know, will there be another layoff?" He talks and talks and talks, she goes, "Okay, but Marc, you didn't answer my question. Will there be another layoff?" He still avoids it, but the second time he actually says something helpful. He says, "Look, 2021 was the best year ever for Salesforce." He says, "I'm not talking about our." He's like, "The calendar 2021 was the best year ever. We staffed up expecting 2022 to be like 2021, and really pretty much from the beginning of 2022, it wasn't. The deeper we got into it just became more and more painful and more and more obvious that we had to do something, and eventually we finally did it. Right? Is that a fair assessment? Was that similar for you guys? Actually, I mean, it's actually the opposite. Oh, really? 2022 was a record year for us. Yeah. Record across the board. Record cloud consumption, record revenue, record operating margin improvement. We're talking about records literally across the board. We did this from a position of strength. Yeah. It goes back to the financial discipline and operational discipline this management team has around building a profitable business over the long term. Yeah. See, I feel like that actually makes it harder. It does. Yeah. Yeah, because it's like, well, do we actually have to do it? Well, you know, and we went back and forth on it, but the answer that we landed on was we're moving forward with this plan. We're committed to it, and we're gonna go off and then execute against it. Okay, great. All right, there we go. Bear case number one, right? Number two. Number one was, you know, burning too much cash responses. You know, Q4 this year will be operating profit break even, and we were on plan at least. Yeah. Yeah. We were on plan. Okay. Number two was, hey, there's something wrong 'cause of the open source element of this product, and in the end, the fact that there's open source out there is gonna mean that it's commoditized, and there's gonna be competition that's gonna come up, and it's gonna be ugly. Well, we embrace the open source community. Yeah. The fact that there's little, if any, argument out there that Kafka is the de facto data streaming platform out there. Yeah. We wanna nurture that community. The reality, though, is Kafka open source is an on-prem data streaming platform, and the world is moving to cloud and to hybrid. With that as the dynamic at play, the feature and functionality that we have put into play around security, data governance, data streaming, our Confluent Cloud offering is something that you can't get from the open source community. We believe that it's only a matter of time for those open source customers to flip over to Confluent. In fact, we've made it incredibly easy. We've removed the paywall capability from Confluent Cloud. We want developers to have their first taste of what data streaming can be with Confluent Cloud. We've built off a proprietary technology stack on top of the open source, which provides massive differentiation. I know we'll get to Immerok in a moment into Flink, but when we add another open source project into the mix, it becomes even a more compelling opportunity for us to sell to, not only the developer community, but increasingly this is a strategic priority where CXO-level folks are getting involved around understanding the streaming side of their business. Why was there ever a paywall? Well, there was a paywall. Like, yeah, look at it. You look back at it now and you're like, "Oh, we shouldn't have had it," or? Yeah. Did times change? Startups, there's always gonna be experimentation. Yeah. Right? back in Q3 of 2018 when Confluent Cloud was originally offered, I think the starting point was, "Well, let's have a paywall. People can swipe their credit card and get started." By removing the paywall, what we've seen is really just a robust number of unique sign-up users that are coming in. Mm-hmm Without having to do the paywall, or swipe their credit card. This is I think it was an experimentation, we made the decision to remove the paywall, we think that will be benefiting us down the road. Insight Partners wrote up this summary of product-led growth. There's one chapter which is about MongoDB. I don't know if you've seen this. The big thing that the cloud version of MongoDB did for them is for the, y ou don't really know who's downloaded open source software. It's kind of bad manners to make people identify themselves, right? But when you had a cloud user, no matter how small, you knew who they were, right? Secondly, you could see who was consuming, and that was the huge thing for them, right? They're like, "Oh my gosh, you know, this bank is starting to." They call them up, and you'd say, "You guys are starting to consume a ton of Atlas. Do you wanna talk to us? You know, we might be able to help you optimize it." Then they ended up selling a lot more of the on-prem to the people who are consuming cloud. Is that dynamic happening for you guys with the Confluent Cloud? We definitely see that dynamic happening. The onboarding of customers through Confluent Cloud has multiple benefits. The ones that you just mentioned for sure, but also just the cost of customer acquisition goes down a lot. Mm-hmm. We're able to really see a very healthy dynamic with Confluent Cloud around cost of customer acquisition and the ability to really go after those customers, and see what the expansion opportunity could be over time. Yeah. I'm highlighting that part. Okay. Let's do, 'cause now you're excited about Immerok, it sounds like. Very excited. Okay, let's hear it. Why, why are you excited? Okay. Think of things in layers, right? Kafka and Confluent is the connectivity layer that enables customers to connect their applications and databases to run their businesses in real time. The application layer and the stream processing layer is the next layer up. If you talk to any developer these days, any new application is being developed with streaming capabilities. Any legacy application that's out there, a lot of those are being retrofit- Mm-hmm. Into streaming applications. With the acquisition of Immerok and Flink, it's the second most successful open source project behind Kafka. Okay. If you look at all of the Flink users out there's like a 75%-80% overlap with those Flink users and those customers are using Kafka as well. Mm. There's this complementary nature of the connective tissue and then the applications that are being that are being built on top of it. That is gonna be a very powerful positioning for the company on a go-forward basis. It will enable us to get, you know, more wallet share and spend, but more importantly, it will enable our customers to really build out streaming applications, and there's this network effect that will be beneficial because the more the data that's flowing through streaming applications helps with the underlying Confluent business as well. It's a very important step in our company's evolution. General availability of our cloud-based Flink offering will come out in Q4 of this year. We'll start monetizing it in 2024 and beyond. Kafka and Confluent were sort of the old TIBCO, Informatica, and IBM MQ Series, right? All the things that connected you. I have an allergic reaction to that. I know. I know. I know. I know. Yeah, that's. What is the equivalent of what Immerok is? Yeah, think of it this way. Is it A2A? If you think of it. Is it like an app server? If you think of a, if a database. It's like a database. If you have a database, like the storage layer and the query layer. Okay. If you think this is kind of a crude analogy, but Kafka would be like the storage layer. Yeah. We do a lot more than storage, obviously. The query layer would be like a, like an Immerok or Flink. Yeah. Okay. Awesome. Oh, we have two minutes. All right. Any questions from our audience? What are some of your assumptions for cloud growth this year, and what are the key driving things in your cloud growth? I'm sorry, I couldn't really hear that. Can you ask him to say it a little louder, Joey? Cloud growth for this year. The cloud growth? Yeah. How are you thinking about that for 2023, and what are the key assumptions there you're making in terms of cloud? Yeah. We just came off of a year where our cloud business grew triple digits. We saw really healthy sequential net adds throughout Q2 through Q4. For fiscal year 2023, what we're effectively saying is cloud will be 50% of revenues inn Q4. That implies a very healthy sequential growth rate. Part of the dynamic around this is we have current RPO coverage that gives us very healthy line of sight to that. Even in an environment where consumption has been more challenged for other companies, we've been able to show really positive progress on decreasing time to value for customers to get on that ramp. We feel good about that. When you look at our guide and you look at the 50% revenue contribution from cloud, you can imply what the annual growth rate will be, but it'll be very healthy. Can I get Rohan the last question? Yeah. All right. Number one thing you think investors don't understand as well as they should about Confluent? That's a very good question. I'd say when you think about Confluent, people really don't understand how big the open source community is. Mm. We've got hundreds of thousands of organizations actually using Kafka. People generally think of Confluent as an evangelical sale. It is actually not an evangelical sale. We've got huge amount of developer love, adoption of the broad technology. Over the last four years, we have launched Confluent Cloud, and that's been a meaningful differentiator in how we are differentiating ourselves with the open source community. Steffan touched upon it a little on this topic. I think Confluent Cloud with the product differentiation, which we call is 10x better than open source, it's complete, as in it has multiple connectors that provide great integration. It's cloud native. It's not easy to build a truly cloud native product. Our Confluent Cloud product truly scales up and down with usage, and it's everywhere. That product benefits combined with the meaningful total cost of ownership that we provide and the ROI we provide to our customers, makes it a very compelling story. If you think about it, great open source, hundreds of thousands of organizations using it, and we've got this cloud product which is truly differentiating not only from a technology standpoint, but also from a TCO and ROI standpoint. Awesome. All right. Thank you guys so much for coming. We really appreciate it. Thank you for hosting us. That was a nice summary. Appreciate it.