CONFLUENT, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and our audited consolidated financial statements and the related notes and the discussion under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" for the fiscal year endedDecember 31, 2020 included in the final prospectus for our initial public offering ("IPO") dated as ofJune 23, 2021 and filed with theSecurities and Exchange Commission ("SEC"), pursuant to Rule 424(b)(4) onJune 25, 2021 ("Final Prospectus"). This discussion, particularly information with respect to our future results of operations or financial condition, business strategy and plans, and objectives of management for future operations, includes forward-looking statements that involve risks and uncertainties as described under the heading "Special Note About Forward-Looking Statements" in this Quarterly Report on Form 10-Q. You should review the disclosure under the heading "Risk Factors" in this Quarterly Report on Form 10-Q for a discussion of important factors that could cause our actual results to differ materially from those anticipated in these forward-looking statements. Unless the context otherwise requires, all references in this Quarterly Report on Form 10-Q to "we," "us," "our," "our company," and "Confluent" refer toConfluent, Inc. and its consolidated subsidiaries. Unless otherwise indicated, references to our "common stock" include our Class A common stock and Class B common stock. Overview Confluent is on a mission to set data in motion. We were founded in 2014 to pioneer this fundamentally new category of data infrastructure designed to connect all the applications, systems, and data layers of a company around a real-time central nervous system. This new data infrastructure software has emerged as one of the most strategic parts of the next-generation technology stack, and using this stack to harness data in motion is critical to the success of every modern company as they strive to compete and win in the digital-first world. Prior to Confluent, our founders created the open source software project Apache Kafka, a technology that has been central to enabling data in motion. Since our founding, we have heavily invested in product development to build a complete, cloud-native platform for data in motion. Confluent is designed to act as the nexus of real-time data, from every source, allowing it to stream across the organization and enabling applications to harness it to power real-time customer experiences and data-driven business operations. Our offering enables organizations to deploy production-ready applications that span across cloud environments and data centers, while scaling elastically with enhanced features for security, compliance, and governance. Our platform provides the capabilities to fill the structural, operational, and engineering gaps required for businesses to fully realize the power of data in motion. We enable software developers to easily build their initial applications to harness data in motion, and enable large, complex enterprises to make data in motion core to everything they do. As organizations mature in their adoption cycle, we enable them to quickly, securely, and reliably build more and more applications that take advantage of data in motion. The results have a dual effect: businesses continuously improve their ability to provide better customer experiences and concurrently drive data-driven business operations. We believe that Confluent, over time, will become the central nervous system for modern digital enterprises, providing ubiquitous real-time connectivity and powering real-time applications across the enterprise. We generate our revenue primarily from the sale of subscriptions to our offering that can be deployed in two different ways. Confluent Platform is an enterprise-ready, self-managed software offering that can be deployed in our customers' on-premise, private cloud, and public cloud environments. Confluent Cloud is a fully-managed, cloud-native software-as-a-service ("SaaS") offering available on all of the leading cloud providers. These two core offerings can be leveraged independently or together, spanning the various public cloud, private cloud, and on-premise environments in which our customers operate. Confluent Platform customers receive access to our proprietary features and various tiers of customer support. Our Confluent Platform subscriptions primarily have one-year terms and are generally billed annually in advance. Confluent Cloud customers may purchase subscriptions either without a minimum commitment contract on a month-to-month basis, which we refer to as pay-as-you-go, or under a usage-based minimum commitment contract of at least one year in duration, in which customers commit to a fixed minimum monetary amount at specified per-usage rates. Pay-as-you-go customers are billed, and revenue from them is recognized, based on usage. Customers with usage-based minimum commitments are typically billed annually in advance, and we recognize revenue from such 26
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subscriptions based on usage by the customer. As a result, our revenue may fluctuate from period to period due to varying patterns of customer consumption.
We are focused on the acquisition of new customers and expanding within our current customers. Our go-to-market model benefits from our self-service motions driven by our cloud-native platform offerings, our widespread mindshare among developers through Apache Kafka, community downloads, and our enterprise sales force. We are able to acquire new customers through seamless and frictionless self-service cloud adoption and free cloud trials, as well as community downloads. For example, after users get started with our free cloud trial, they can easily convert online to become paying customers either on a pay-as-you-go model or with a minimum commitment contract. Once customers see the benefits of our platform for their initial use cases, they often expand into other use cases and lines of business, divisions, and geographies. Our deep technical expertise, coupled with our product capabilities and laser focus on customer outcomes, enable us to form strategic partnerships with our customers to guide and accelerate this journey. This expansion often generates a natural network effect in which the value of our platform to a customer increases as more use cases are adopted, more users and teams are onboarded, more applications and systems are connected, and more data is added. We had 2,830 customers and 1,390 customers as ofJune 30, 2021 andJune 30, 2020 , respectively, representing year-over-year growth of 104%. We have experienced significant growth, with revenue increasing from$53.9 million and$104.8 million for the three and six months endedJune 30, 2020 , respectively, to$88.3 million and$165.4 million for the three and six months endedJune 30, 2021 , respectively, representing year-over-year growth of 64% and 58%, respectively. Impact of COVID-19 The ongoing COVID-19 pandemic has caused general business disruption worldwide. The full extent to which the COVID-19 pandemic, including any new variants, will directly or indirectly impact our business, results of operations, cash flows, and financial condition will depend on certain developments, including the duration and spread of the pandemic, related public health measures, how national, state, and local governments continue to respond, rate of COVID-19 vaccinations, and the pandemic's impact on the global economy generally and our customers specifically, all of which remain highly uncertain and cannot be accurately predicted. Although our results of operations, cash flows, and financial condition were not materially impacted in the three months endedJune 30, 2021 , we have experienced, and may experience in future periods, a modest adverse impact on certain parts of our business as a result of governmental restrictions and other measures to mitigate the spread of COVID-19, including delays in delivery of professional services and education services to customers and a lengthening in the sales cycle for some prospective customers. If our customers or partners experience downturns or uncertainty in their own business operations or revenue resulting from the ongoing COVID-19 pandemic, they may decrease or delay their spending, request pricing discounts, or seek renegotiations of their contracts, any of which may result in decreased revenue, dollar-based net retention rate ("NRR"), and cash receipts for us. Despite the adverse impacts described above, the pandemic has caused more of our existing and potential customers to accelerate their digital transformation efforts. As a result, we believe the value of our offering is becoming even more evident, which may result in a positive impact on our business over the long term. In addition, during the six months endedJune 30, 2021 , we saw slower growth in certain operating expenses due to reduced business travel and the virtualization or cancellation of customer, partner, and employee events. While slower growth in operating expenses had a short-term benefit to our results of operations for the six months endedJune 30, 2021 , we do not yet have visibility into the full impact this will have on our business. We adopted several measures in response to the COVID-19 pandemic to focus on maintaining business continuity and preparing for the long-term success of our business, including temporarily requiring employees to work remotely, suspending non-essential travel by our employees, requiring events to be held virtually, and temporarily reducing the pace of our employee hiring across all functions in the second and third quarters of 2020. In particular, the reduction in employee hiring for our sales and marketing organization may negatively impact our near- to medium-term growth rate and revenue. We may take further actions as may be required by government authorities or that we determine are in the best interests of our business, employees, customers, and business partners. The global impact of COVID-19 continues to rapidly evolve, and while the broader implications of the ongoing COVID-19 pandemic remain uncertain, we will continue to monitor the situation and the effects on our business and operations. 27
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Key Factors Affecting Our Performance
Developing Innovative, Market-Leading Offerings and Expanding Developer Mindshare
We are focused on delivering market-leading offerings. We believe it is critical for us to maintain our product leadership position and further increase the strength of our brand and reputation to drive revenue growth. We developed Confluent Cloud, our cloud-native SaaS offering, in 2017 to capitalize on the existing demand for a fully-managed cloud service for Apache Kafka. Confluent Cloud has grown rapidly since launch, as organizations have been making significant investments in digital infrastructure with the goal of both driving efficiencies across their businesses, and better leveraging the data that powers their processes and customer experiences. In addition, we continue to release new product enhancements and features to simplify application development and real-time analytics and enhance security and data governance. We intend to continue investing in our engineering capabilities and marketing activities to maintain our strong position within the developer community. Our results of operations may fluctuate as we make these investments to drive increased customer adoption and usage.
Increasing Adoption of Confluent Cloud
We believe our cloud-native Confluent Cloud offering represents an important growth opportunity for our business. Organizations are increasingly looking for a fully-managed offering to seamlessly leverage data in motion across a variety of environments. In some cases, customers that have been self-managing deployments through Confluent Platform subsequently have become Confluent Cloud customers. We offer customers a free cloud trial and a pay-as-you-go arrangement to encourage adoption and usage over time. We will continue to leverage our cloud-native differentiation to drive our growth. We expect Confluent Cloud's contribution to our subscription revenue to increase over time. Our Confluent Cloud revenue increased from$6.6 million and$12.8 million in the three and six months endedJune 30, 2020 , respectively, to$19.7 million and$33.6 million in the three and six months endedJune 30, 2021 , respectively, representing year-over-year growth of 200% and 163%, respectively.
Growing Our Customer Base and Extending Our Global Reach
We are intensely focused on continuing to grow our customer base. We have invested and will continue to invest heavily in our sales and marketing efforts and developer community outreach, which are critical to driving customer acquisition. We historically focused on large enterprise customers with significant expansion opportunities and built a go-to-market motion around this approach. As we grew our cloud offering and created more self-serve opportunities, we have significantly broadened our reach of customers and are able to attract a greater array of customers. This is evidenced by our significant increase in customer count in recent years, driven by Confluent Cloud customers. Our ability to attract new customers will depend on a number of factors, including our success in recruiting and scaling our sales and marketing organization, our ability to accelerate ramp time of our sales force, the impact of marketing efforts to enhance our brand, and competitive dynamics in our target markets. We had 2,830 customers and 1,390 customers as ofJune 30, 2021 andJune 30, 2020 , respectively, spanning organizations of all sizes and industries. Our customer count treats affiliated entities with the same parent organization as a single customer and includes pay-as-you-go customers. During the three and six months endedJune 30, 2021 , 36% of our total revenue came from outside ofthe United States .
Retaining and Expanding Revenue from Existing Customers
Our business model is driven by customer renewals and increasing existing
customer subscriptions over time, referred to as land-and-expand. We believe we
have significant opportunities to increase our revenue as customers expand their
use of our offering in connection with migrating more data to the public cloud,
identifying new use cases, and realizing the benefits of data in motion. Our
ability to retain and expand revenue from existing customers will depend on a
number of factors, including the impact of existing customers becoming a larger
portion of our overall customer base, large initial deal sizes that incorporate
potential growth, the impact of the COVID-19 pandemic, the initial impact of
existing customers transitioning to our usage-based Confluent Cloud offering,
customer satisfaction with our subscriptions and services, loss of large
customers including the timing of any such loss, and the mix of commercial and
enterprise customers, among other things.
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Investing in Growth and Scaling our Business
We believe our market opportunity is significant, and we are focused on continuing to make substantial investments in our long-term revenue and profitability potential. We believe it is critical to scale across all organizational functions, including our sales and marketing organization, in order to capture this opportunity. Any investments we make in our sales and marketing organization will occur in advance of experiencing the benefits from such investments, and it may be difficult for us to determine if we are efficiently allocating resources within the organization. We intend to continue to invest heavily to grow our business to take advantage of our expansive market opportunity rather than optimize for profitability or cash flow in the near future.
Key Business Metrics
We monitor the key business metrics set forth below to help us evaluate our business and growth trends, establish budgets, measure our performance, and make strategic decisions. The calculation of the key metrics discussed below may differ from other similarly titled metrics used by other companies, securities analysts, or investors.
Remaining Performance Obligations ("RPO")
RPO as a metric represents the amount of contracted future revenue that has not yet been recognized as of the end of each period, including both deferred revenue that has been invoiced and non-cancelable committed amounts that will be invoiced and recognized as revenue in future periods. RPO as a metric excludes pay-as-you-go arrangements. RPO as a metric is not necessarily indicative of future revenue growth because it does not account for the timing of customers' consumption or their consumption of more than their contracted capacity. RPO may also fluctuate due to a number of factors, including the timing of renewals, average contract terms, seasonality, and dollar amount of customer contracts. Due to these factors, it is important to review RPO in conjunction with revenue and other financial metrics disclosed elsewhere in this Quarterly Report on Form 10-Q. Our RPO was$327.2 million and$190.6 million as ofJune 30, 2021 and 2020, respectively.
Customers with
We define ARR as the subscription revenue we would contractually expect to receive from customers over the following 12 months assuming no increases or reductions in their subscriptions. ARR excludes services and pay-as-you-go arrangements. Similar to RPO, ARR as a metric is not necessarily indicative of future revenue growth because it does not account for the timing of customers' consumption or their consumption of more than their contracted capacity. Large customer relationships lead to scale and operating leverage in our business model. Compared with smaller customers, large customers present a greater opportunity for us because they have larger budgets, greater potential for migrating more applications over time, and a wider range of potential use cases for data in motion. As a measure of our ability to scale with our customers and attract large enterprises to our offering, we count the number of customers that contributed$100,000 or greater in ARR as of period end. Our customer count may also fluctuate due to acquisitions, consolidations, spin-offs, and other market activity. We had 617 and 408 customers with$100,000 or greater in ARR as ofJune 30, 2021 and 2020, respectively.
Dollar-Based Net Retention Rate ("NRR")
We calculate our dollar-based NRR as of a period end by starting with the ARR
from the cohort of all customers as of 12 months prior to such period end, or
Prior Period Value. We then calculate the ARR from these same customers as of
the current period end, or Current Period Value, which includes any growth in
the value of subscriptions and is net of contraction or attrition over the prior
12 months. Services and pay-as-you-go arrangements are excluded from the
calculation of ARR. We then divide the Current Period Value by the Prior Period
Value to arrive at our dollar-based NRR. The dollar-based NRR includes the
effect, on a dollar-weighted value basis, of our subscriptions that expand,
renew, contract, or attrit, but excludes ARR from new customers in the current
period. Our dollar-based NRR is subject to adjustments for acquisitions,
consolidations, spin-offs, and other market activity. We believe that our
dollar-based NRR provides useful information about the evolution of our existing
customers and our future growth
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prospects. Our dollar-based NRR was over 130% as of
Components of Results of Operations
Revenue
We derive revenue primarily from subscriptions and, to a lesser extent, services.
Subscription Revenue. Our subscription revenue consists of revenue from term-based licenses that include post-contract customer support, maintenance, and upgrades, referred to together as PCS, which we refer to as Confluent Platform, and our SaaS offering, which we refer to as Confluent Cloud. We recognize a portion of the revenue from our term-based license subscriptions at a point in time, upon delivery and transfer of control of the underlying license to the customer, which is typically the effective start date. Revenue from PCS, which represents a substantial majority of the revenue from our term-based license subscriptions, is recognized ratably over the contract term. The majority of our revenue from Confluent Cloud in the three and six months endedJune 30, 2021 and 2020 was based on usage-based minimum commitments and is recognized on a usage basis, as usage represents a direct measurement of the value to the customer of the subscription transferred as of a particular date relative to the total value to be delivered over the term of the contract. A smaller portion of revenue from Confluent Cloud in the three and six months endedJune 30, 2021 and 2020 was derived from contracts that are not usage-based, with revenue from these contracts recognized ratably over the non-cancelable term of the subscription for such contracts, generally beginning on the date that the service is made available to the customer. Our subscriptions primarily have one-year terms, and are generally non-cancelable and non-refundable. We also provide pay-as-you-go arrangements, which consist of month-to-month SaaS contracts. These arrangements have historically represented an immaterial portion of our subscription revenue.
Services Revenue. Services revenue consists of revenue from professional services and education services, which are generally sold on a time-and-materials basis. Revenue for professional services and education services is recognized as these services are delivered.
We expect our total revenue may vary from period to period based on, among other things, the timing and size of new subscriptions, the rate of customer renewals and expansions, delivery of professional services, ramp time and productivity of our salesforce, the impact of significant transactions, seasonality, and fluctuations in customer consumption for our usage-based offering.
Cost of Revenue
Cost of Subscription Revenue. Cost of subscription revenue primarily includes personnel-related costs, including salaries, bonuses and benefits, and stock-based compensation, for employees associated with customer support and maintenance, third-party cloud infrastructure costs, amortization of internal-use software, and allocated overhead. We expect our cost of subscription revenue to increase in absolute dollars as our subscription revenue increases. Cost of Services Revenue. Cost of services revenue primarily includes personnel-related costs, including salaries, bonuses and benefits, and stock-based compensation, for employees associated with our professional services and education services, travel-related costs, and allocated overhead. We expect our cost of services revenue to increase in absolute dollars as our services revenue increases.
Gross Profit and Gross Margin
Gross Profit. Gross profit represents revenue less cost of revenue.
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Gross Margin. Gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by a variety of factors, including the average sales price of our subscriptions and services, changes in our revenue mix, including the mix of revenue between our Confluent Platform, Confluent Cloud, and service offerings, timing and amount of usage of third-party cloud infrastructure resources, and infrastructure optimization. We expect our gross margin to fluctuate over time depending on the factors described above.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Personnel-related costs are the most significant component of each category of operating expenses. Operating expenses also include allocated overhead costs for facilities, information technology, and recruiting. Research and Development. Research and development expenses consist primarily of personnel-related costs, including salaries, bonuses and benefits, and stock-based compensation, net of capitalized amounts, third-party cloud infrastructure expenses incurred in developing our platform, contractor and professional services fees, software and subscription services dedicated for use by our research and development organization, and allocated overhead. We expect our research and development expenses will continue to increase in absolute dollars as our business grows and we continue to invest in our offering. Sales and Marketing. Sales and marketing expenses consist primarily of personnel-related costs, including salaries, sales commissions, bonuses and benefits, and stock-based compensation, costs related to marketing programs, travel-related costs, amortization of deferred contract acquisition costs, which consist of sales commissions and the associated payroll taxes, and allocated overhead. Marketing programs consist of advertising, events, corporate communications, and brand-building and developer-community activities. We expect our sales and marketing expenses will increase in absolute dollars over time and continue to be our largest operating expense for the foreseeable future as we expand our sales force, increase our marketing resources, and expand into new markets. General and Administrative. General and administrative expenses consist primarily of personnel-related costs, including salaries, bonuses and benefits, and stock-based compensation for administrative functions including finance, legal, and human resources, professional fees, software and subscription services dedicated for use by our general and administrative functions, and allocated overhead. As a result of our IPO, we have incurred and expect to continue to incur additional expenses to operate as a public company, including costs to comply with the rules and regulations applicable to companies listed on a national securities exchange, costs related to compliance and reporting obligations, and increased expenses for investor relations and professional services. We also recognized non-cash expense of$13.3 million related to the charitable donation of our Class A common stock inJune 2021 . We expect that our general and administrative expenses will increase in absolute dollars as our business grows.
Interest Income
Interest income consists primarily of interest earned on our cash equivalents and marketable securities.
Other Income (Expense), Net Other income (expense), net consists primarily of amortization of premiums and accretion of discounts on marketable securities, gains and losses from foreign currency transactions, and realized gains and losses on marketable securities.
Provision for (Benefit from) Income Taxes
Provision for (benefit from) income taxes consists primarily of income taxes in certain foreign andU.S. state jurisdictions in which we conduct business. We maintain a full valuation allowance against ourU.S. andU.K. deferred tax assets because we have concluded that it is more likely than not that the deferred tax assets will not be realized. 31
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Results of Operations
The following table sets forth our condensed consolidated statements of operations data for the periods presented:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(in thousands)
Revenue:
Subscription $ 78,516 $ 46,973 $ 146,508 $ 90,916
Services 9,822 6,879 18,858 13,840
Total revenue 88,338 53,852 165,366 104,756
Cost of revenue:
Subscription(1)(2) 20,292 11,734 36,049 22,748
Services(1)(2) 9,717 5,956 17,798 12,755
Total cost of revenue 30,009 17,690 53,847 35,503
Gross profit 58,329 36,162 111,519 69,253
Operating expenses:
Research and development(1)(2) 33,225 18,875 57,538 38,617
Sales and marketing(1)(2) 73,206 36,447 131,715 74,764
General and 37,943 8,334 53,455 16,749
administrative(1)(2)
Total operating expenses 144,374 63,656 242,708 130,130 Operating loss (86,045 ) (27,494 ) (131,189 ) (60,877 ) Interest income 688 1,303 1,532 1,746 Other expense, net (643 ) (211 ) (979 ) (518 ) Loss before income taxes (86,000 ) (26,402 ) (130,636 ) (59,649 ) Provision for (benefit from) 2,170 (106 ) 2,060 282 income taxes Net loss$ (88,170 ) $ (26,296 ) $ (132,696 ) $ (59,931 )
(1) Includes stock-based compensation expense as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(inthousands)
Cost of revenue - subscription
$ 3,147 $ 986 Cost of revenue - services 1,055 312 1,599 662 Research and development 8,932 2,250 12,443 4,296 Sales and marketing 11,155 2,735 16,131 5,108 General and administrative 11,202 1,251 14,549 2,471
Total stock-based compensation expense
$ 47,869 $ 13,523
(2) Includes employer taxes on employee stock transactions as follows:
Three Months Ended June 30, Six Months Ended June 30,
2021 2020 2021 2020
(inthousands)
Cost of revenue - subscription $ 38 $ - $ 38 $ 1
Cost of revenue - services 288 - 288 -
Research and development 277 - 398 9
Sales and marketing 610 - 713 22
General and administrative 222 5 261 49
Total employer taxes on employee
stock transactions $ 1,435 $ 5 $ 1,698 $ 81
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The following table sets forth our condensed consolidated statements of operations data expressed as a percentage of revenue for the periods indicated:
Three Months Ended June 30 ,
Six Months Ended
2021 2020 2021 2020
Revenue:
Subscription 89% 87% 89% 87%
Services 11 13 11 13
Total revenue 100 100 100 100
Cost of revenue:
Subscription 23 22 22 22
Services 11 11 11 12
Total cost of revenue 34 33 33 34
Gross profit 66 67 67 66
Operating expenses:
Research and development 38 35 35 37
Sales and marketing 83 68 80 71
General and administrative 43 15 32 16
Total operating expenses 164 118 147 124
Operating loss (98 ) (51 ) (80 ) (58 )
Interest income 1 2 1 1
Other expense, net 0 0 0 0
Loss before income taxes (97 ) (49 ) (79 ) (57 )
Provision for (benefit from) 3 0 1 0
income taxes
Net loss (100)% (49)% (80)% (57)%
Comparison of the Three Months Ended
Revenue
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Subscription $ 78,516 $ 46,973 $ 31,543 67%
Services 9,822 6,879 2,943 43%
Total revenue $ 88,338 $ 53,852 $ 34,486 64%
Subscription revenue increased by $31.5 million during the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 . The increase in
revenue was primarily from sales to new customers and the remaining increase was
attributable to sales to existing customers. Sales to new customers represent
the revenue recognized from new customers acquired in the 12 months prior to the
reporting date. A further indication of our ability to expand from existing
customers is through our dollar-based net retention rate of over 120% as of June
30, 2021 . We had 617 customers with $100,000 or greater in ARR as of June 30,
2021 , increasing from 408 as of June 30, 2020 . Confluent Platform and Confluent
Cloud contributed 75% and 25% of our subscription revenue during the three
months ended June 30, 2021 , respectively, compared to 86% and 14% during the
three months ended June 30, 2020 , respectively.
Services revenue increased by $2.9 million during the three months ended June
30, 2021 compared to the three months ended June 30, 2020 . This was primarily
due to an increase in delivery of professional services as we expanded our
professional services organization to help our customers further realize the
benefits of our offering.
Cost of Revenue, Gross Profit, and Gross Margin
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Three Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Cost of revenue
Subscription $ 20,292 $ 11,734 $ 8,558 73%
Services 9,717 5,956 3,761 63%
Total cost of revenue $ 30,009 $ 17,690 $ 12,319 70%
Gross profit $ 58,329 $ 36,162 $ 22,167 61%
Three Months Ended June 30,
2021 2020
Gross margin
Subscription 74% 75%
Services 1% 13%
Total gross margin 66% 67%
Cost of subscription revenue increased by $8.6 million during the three months
ended June 30, 2021 compared to the three months ended June 30, 2020 . This
increase was primarily due to increased headcount, contributing to an increase
of $4.8 million in personnel-related costs and allocated overhead costs, and an
increase of $2.5 million in third-party cloud infrastructure costs. The increase
in personnel-related costs included an increase of $1.7 million in stock-based
compensation expense as a result of increased headcount and equity awards
granted to existing employees.
Cost of services revenue increased by $3.8 million during the three months ended
June 30, 2021 compared to the three months ended June 30, 2020 . This increase
was primarily due to increased headcount, contributing to an increase of $2.6
million in personnel-related costs and allocated overhead costs, and an increase
of $1.0 million in consulting services. The increase in personnel-related costs
included an increase of $0.7 million in stock-based compensation expense as a
result of increased headcount and equity awards granted to existing employees.
Our subscription gross margin decreased primarily due to the change in our
revenue mix and higher personnel-related costs, partially offset by economies of
scale resulting from increased efficiency and optimization of our
infrastructure. Our services gross margin decreased primarily due to higher
personnel-related costs.
Research and Development
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Research and development $ 33,225 $ 18,875 $ 14,350 76%
Percentage of revenue 38% 35%
Research and development expenses increased by $14.4 million during the three
months ended June 30, 2021 compared to the three months ended June 30, 2020 . The
increase was primarily due to increased headcount, contributing to an increase
of $12.7 million in personnel-related costs and allocated overhead costs. The
increase in personnel-related costs included an increase of $6.7 million in
stock-based compensation expense, net of amounts capitalized, as a result of
increased headcount and equity awards granted to existing employees.
Sales and Marketing
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Sales and marketing $ 73,206 $ 36,447 $ 36,759 101%
Percentage of revenue 83% 68%
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Sales and marketing expenses increased by$36.8 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . The increase was primarily due to increased headcount, contributing to an increase of$28.5 million in personnel-related costs and allocated overhead costs, an increase of$3.7 million in advertising costs and marketing programs, and an increase of$2.8 million of amortization of deferred contract acquisition costs. The increase in personnel-related costs included an increase of$8.4 million in stock-based compensation expense as a result of increased headcount and equity awards granted to existing employees. General and Administrative Three Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) General and administrative$ 37,943 $ 8,334 $ 29,609 355% Percentage of revenue 43% 15% General and administrative expenses increased by$29.6 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 . This increase was primarily due to increased headcount, contributing to an increase of$14.2 million in personnel-related costs and allocated overhead costs, and an increase of$13.3 million associated with the charitable donation of our Class A common stock. The increase in personnel-related expenses included an increase of$6.1 million of stock-based compensation expense as a result of increased headcount and equity awards granted to existing employees, as well as$3.8 million of stock-based compensation expense related to performance-based options, for which the performance-based vesting condition was satisfied upon the effectiveness of the IPO. Interest Income Three Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) Interest income$ 688 $ 1,303$ (615 ) (47)% Interest income decreased by$0.6 million during the three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 primarily due to lower returns on marketable securities. Other Income (Expense), Net Three Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) Other expense, net$ (643 ) $ (211 ) $ (432 ) 205%
The change in other expense, net during the three months ended
Provision for (Benefit from) Income Taxes
Three Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Loss before income taxes $ (86,000 ) $ (26,402 ) $ (59,598 ) (226)%
Provision for (benefit from)
income taxes 2,170 (106 ) 2,276 2147%
Effective tax rate (2.5)% 0.4%
We maintain a full valuation allowance on our U.S. and U.K. deferred tax assets,
and the significant components of our recorded tax expense are current cash
taxes in various jurisdictions. The cash taxes are impacted by each
jurisdiction's individual tax rates, laws on the timing of recognition of income
and deductions, and availability of net
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operating losses and tax credits. Our effective tax rate might fluctuate significantly on a quarterly basis and could be adversely affected to the extent earnings are lower than forecasted in countries that have lower statutory rates and higher than forecasted in countries that have higher statutory rates.
Comparison of the Six Months Ended
Revenue
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Subscription $ 146,508 $ 90,916 $ 55,592 61%
Services 18,858 13,840 5,018 36%
Total revenue $ 165,366 $ 104,756 $ 60,610 58%
Subscription revenue increased by $55.6 million during the six months ended June
30, 2021 compared to the six months ended June 30, 2020 . The increase in revenue
was primarily from sales to new customers and the remaining increase was
attributable to sales to existing customers. Sales to new customers represent
the revenue recognized from customers acquired in the 12 months prior to each
discrete quarter end within the year-to-date reporting period. A further
indication of our ability to expand from existing customers is through our
dollar-based net retention rate of over 120% as of June 30, 2021 . We had 617
customers with $100,000 or greater in ARR as of June 30, 2021 , increasing from
408 as of June 30, 2020 . Confluent Platform and Confluent Cloud contributed 77%
and 23% of our subscription revenue during the six months ended June 30, 2021 ,
respectively, compared to 86% and 14% during the six months ended June 30, 2020 ,
respectively.
Services revenue increased by $5.0 million during the six months ended June 30,
2021 compared to the six months ended June 30, 2020 . This was primarily due to
an increase in delivery of professional services as we expanded our professional
services organization to help our customers further realize the benefits of our
offering.
Cost of Revenue, Gross Profit, and Gross Margin
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Cost of revenue
Subscription $ 36,049 $ 22,748 $ 13,301 58%
Services 17,798 12,755 5,043 40%
Total cost of revenue $ 53,847 $ 35,503 $ 18,344 52%
Gross profit $ 111,519 $ 69,253 $ 42,266 61%
Six Months Ended June 30,
2021 2020
Gross margin
Subscription 75% 75%
Services 6% 8%
Total gross margin 67% 66%
Cost of subscription revenue increased by $13.3 million during the six months
ended June 30, 2021 compared to the six months ended June 30, 2020 . This
increase was primarily due to increased headcount, contributing to an increase
of $7.2 million in personnel-related costs and allocated overhead costs, and an
increase of $4.1 million in third-party cloud infrastructure costs. The increase
in personnel-related costs included an increase of $2.2 million in stock-based
compensation expense as a result of increased headcount and equity awards
granted to existing employees.
Cost of services revenue increased by $5.0 million during the six months ended
June 30, 2021 compared to the six months ended June 30, 2020 . This increase was
primarily due to increased headcount, contributing to an increase of
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$3.5 million in personnel-related costs and allocated overhead costs, and an increase of$1.8 million in consulting services, which were partially offset by a decrease of$0.4 million in travel-related costs primarily due to COVID-19 travel restrictions. The increase in personnel-related costs included an increase of$0.9 million in stock-based compensation expense as a result of increased headcount and equity awards granted to existing employees. Our subscription gross margin remained flat due to economies of scale resulting from increased efficiency and optimization of our infrastructure, despite the change in our revenue mix and higher personnel-related costs. Our services gross margin decreased primarily due to higher personnel-related costs, partially offset by a decrease in travel-related costs in light of COVID-19 travel restrictions. Research and Development Six Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) Research and development$ 57,538 $ 38,617 $ 18,921 49% Percentage of revenue 35% 37% Research and development expenses increased by$18.9 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase was primarily due to increased headcount, contributing to an increase of$16.7 million in personnel-related costs and allocated overhead costs. The increase in personnel-related costs included an increase of$8.1 million in stock-based compensation expense, net of amounts capitalized, as a result of increased headcount and equity awards granted to existing employees. Sales and Marketing Six Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) Sales and marketing$ 131,715 $ 74,764 $ 56,951 76% Percentage of revenue 80% 71% Sales and marketing expenses increased by$57.0 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The increase was primarily due to increased headcount, contributing to an increase of$42.7 million in personnel-related costs and allocated overhead costs, an increase of$6.0 million in advertising costs and marketing programs, and an increase of$5.5 million of amortization of deferred contract acquisition costs. The increase in personnel-related costs included an increase of$11.0 million in stock-based compensation expense as a result of increased headcount and equity awards granted to existing employees. General and Administrative Six Months Ended June 30, Change 2021 2020 $ % (in thousands, except percentages) General and administrative$ 53,455 $ 16,749 $ 36,706 219% Percentage of revenue 32% 16% General and administrative expenses increased by$36.7 million during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . This increase was primarily due to increased headcount, contributing to an increase of$20.1 million in personnel-related costs and allocated overhead costs, and an increase of$13.3 million associated with the charitable donation of our Class A common stock upon the consummation of the IPO. The increase in personnel-related expenses included an increase of$8.3 million of stock-based compensation expense as a result of increased headcount and equity awards granted to existing employees, as well as$3.8 million of stock-based compensation expense related to performance-based options, for which the performance-based vesting condition was satisfied upon the effectiveness of the IPO. 37
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Interest Income
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Interest income $ 1,532 $ 1,746 $ (214 ) (12)%
Interest income decreased by
Other Income (Expense), Net
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Other expense, net $ (979 ) $ (518 ) $ (461 ) (89)%
The change in other expense, net during the six months ended
Provision for (Benefit from) Income Taxes
Six Months Ended June 30, Change
2021 2020 $ %
(in thousands, except percentages)
Loss before income taxes $ (130,636 ) $ (59,649 ) $ (70,987 ) (119)%
Provision for income taxes $ 2,060 $ 282 $ 1,778 630%
Effective tax rate (1.6)% (0.5)%
We maintain a full valuation allowance on our U.S. and U.K. deferred tax assets,
and the significant components of our recorded tax expense are current cash
taxes in various jurisdictions. The cash taxes are impacted by each
jurisdiction's individual tax rates, laws on the timing of recognition of income
and deductions, and availability of net operating losses and tax credits. Our
effective tax rate might fluctuate significantly on a quarterly basis and could
be adversely affected to the extent earnings are lower than forecasted in
countries that have lower statutory rates and higher than forecasted in
countries that have higher statutory rates.
Liquidity and Capital Resources
To date, we have financed our operations principally through proceeds from sales of our equity securities and payments received from our customers. InJune 2021 , we completed our IPO, which resulted in proceeds of$786.6 million , net of underwriting discounts and commissions. As ofJune 30, 2021 , we had cash, cash equivalents, and marketable securities totaling$1,043.9 million . Our cash and cash equivalents primarily consist of bank deposits and money market funds. Our marketable securities consist of corporate notes and bonds, commercial paper,U.S. agency obligations, and municipal bonds. We believe our existing cash, cash equivalents, and marketable securities will be sufficient to fund our operating and capital needs for at least the next 12 months. 38
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We have generated significant operating losses and negative cash flows from operations. As ofJune 30, 2021 , we had an accumulated deficit of$538.7 million . We expect to continue to incur operating losses and negative cash flows from operations in the future and may require additional capital resources to execute strategic initiatives to grow our business. Our future capital requirements will depend on many factors including our growth rate, the timing and extent of spending to support development efforts, the expansion of sales and marketing and international operations, and the continuing market acceptance of our subscriptions and services. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be adversely affected.
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
2021 2020
(in thousands)
Net cash used in operating activities $ (63,155 ) $ (52,487 )
Net cash provided by (used in) investing activities
Net cash provided by financing activities$ 822,928 $ 253,290
Cash Flows from Operating Activities
We generally invoice our customers annually in advance for our term-based licenses and either annually in advance or monthly in arrears for our SaaS offering. Our largest source of operating cash is payments received from our customers. We have in the past and expect in the future to experience seasonality, with the fourth quarter historically being our strongest quarter for new customer sales, renewals, and expansion as a result of large enterprise buying patterns. Accordingly, the operating cash flow benefit from increased collections from our customers generally occurs in the subsequent one to two quarters after billing. We expect seasonality, timing of billings, and collections from our customers to have a material impact on our cash flow from operating activities from period to period. Our primary uses of cash from operating activities are for personnel-related expenses, sales and marketing expenses, third-party cloud infrastructure costs, and overhead expenses. Cash used in operating activities of$63.2 million for the six months endedJune 30, 2021 primarily consisted of our net loss of$132.7 million , adjusted for non-cash charges of$83.2 million , and net cash outflows of$13.7 million from changes in our operating assets and liabilities. Our non-cash charges included$47.9 million of stock-based compensation expense, net of amounts capitalized,$13.3 million of Class A common stock charitable donation expense,$11.6 million of amortization of deferred contract acquisition costs, and$5.6 million of non-cash operating lease costs. The main drivers of the changes in operating assets and liabilities were a$26.3 million increase in deferred contract acquisition costs due to our increased sales,$14.7 million increase in prepaid expenses and other current assets primarily driven by prepaid insurance as a result of becoming a public company,$11.9 million increase in accounts receivable due to overall growth of our sales and our expanding customer base, and a$5.4 million decrease in operating lease liabilities due to lease payments, partially offset by a$31.4 million increase in deferred revenue corresponding with our increased sales, and a$12.9 million increase in accrued expenses and accrued liabilities due to increased headcount and growth in our business. Cash used in operating activities of$52.5 million for the six months endedJune 30, 2020 primarily consisted of our net loss of$59.9 million , adjusted for non-cash charges of$26.9 million , and net cash outflows of$19.5 million from changes in our operating assets and liabilities. Our non-cash charges included$13.5 million of stock-based compensation expense, net of amounts capitalized,$6.1 million of amortization of deferred contract acquisition costs, and$6.1 million of non-cash operating lease costs. The main drivers of the changes in operating assets and liabilities were a$25.3 million increase in accounts receivable due to overall growth of our sales and our expanding customer base, a$13.9 million increase in deferred contract acquisition costs due to our increased sales, and a$5.8 million decrease in operating lease liabilities due to lease payments, partially offset by a$25.0 million increase in deferred revenue corresponding with our increased sales.
Cash Flows from Investing Activities
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Cash provided by investing activities of$63.5 million for the six months endedJune 30, 2021 was primarily due to maturities of marketable securities of$123.0 million , offset by purchases of marketable securities of$56.0 million , capitalized internal-use software development costs of$1.8 million , and purchases of property and equipment of$1.7 million .
Cash used in investing activities of
Cash Flows from Financing Activities
Cash provided by financing activities of$822.9 million for the six months endedJune 30, 2021 was primarily a result of$786.6 million in proceeds from our IPO, net of underwriting discounts and commissions, as well as$37.2 million in proceeds from the issuance of common stock upon exercises of stock options, net of repurchases. Cash provided by financing activities of$253.3 million for the six months endedJune 30, 2020 was due to$249.9 million in net proceeds from the issuance of our Series E redeemable convertible preferred stock, net of issuance costs, and$3.4 million in proceeds from the issuance of common stock upon exercises of stock options, net of repurchases.
Contractual Obligations and Commitments
There were no material changes outside of the ordinary course of business in our contractual obligations and commitments for the six months endedJune 30, 2021 from the contractual obligations and commitments disclosed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Final Prospectus.
Off-Balance Sheet Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q are prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ significantly from the estimates made by management. To the extent that there are differences between our estimates and actual results, our financial condition, results of operations, and cash flows will be affected.
There have been no material changes to our critical accounting policies and estimates as compared to those described in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth in our Final Prospectus.
Recent Accounting Pronouncements
See Note 2 to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for recently adopted accounting pronouncements and accounting pronouncements not yet adopted.
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JOBS Act Accounting Election
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act
provides that an emerging growth company can take advantage of an extended
transition period for complying with new or revised accounting standards. This
provision allows an emerging growth company to delay the adoption of some
accounting standards until those standards would otherwise apply to private
companies. We have elected to use the extended transition period under the JOBS
Act for the adoption of certain accounting standards until the earlier of the
date we (i) are no longer an emerging growth company or (ii) affirmatively and
irrevocably opt out of the extended transition period provided in the JOBS Act.
As a result, our condensed consolidated financial statements may not be
comparable to companies that comply with new or revised accounting
pronouncements as of public company effective dates.
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