Jay Kreps: Yes, on the first question, there’s nothing immediate that changes in the interaction with customers, or at least not in a way that you would immediately notice. Right? So the payment model, the kind of business model that has all been consumption oriented since prior to the IPO, and so you might not notice anything if you’re a customer, hopefully you notice that our field team is more helpful in finding the applications that are critical to your success, making sure that those get to production as quickly as possible. Hopefully they were doing that already, but the consumption incentive kind of directly drives that behavior. But it wouldn’t be something where we have to send you some notice of something changing.
It really is internal to our operations that the change is most apparent. On your second point, I think you will hear about complexity around Kafka or around Flink. I think it’s actually very important to separate out the operational complexity of trying to build a big in house data system that you self-manage from actually using one of these cloud services. The interface to Kafka is very simple, kind of read and write data streams the interface for Flink is just SQL as people are used to. This is kind of the common language of databases or in other common programming languages, very similar constructs. So that developer interface is not complicated. If you want to stand up and build an in house data platform and run it yourself off the open source.
Yes, there’s a lot of rocket science involved in that. And so when we think about how does that affect our sales model? Well, that’s part of what we’re bringing, right. The value of these cloud platforms in particular is taking all that away. You can just depend on this as a service. And I do think that’s where call it 90% of the complexity and this new stuff lies. And that’s always been true. Like running databases is hard, running data systems of all kinds is hard, and this stuff is no different from that.
Shane Xie: All right, thanks, Kash. We’ll take our next question from Pinjalim Bora with JPMorgan, followed by Mizuho.
Pinjalim Bora: Thanks, guys, and thanks for taking the questions. Congrats on the quarter. I want to ask you on the go-to-market changes, I think I heard you have already put kind of the initial changes in place. Maybe go a little bit deeper. What has been rolled out, what is remaining? Because what about the sales enablement side? Because it seems like the conversations for the sales reps also changes a bit. Looking at more use case driven versus committed contracts, maybe talk about what is rolled out and what is remaining.
Jay Kreps: Yes, the kind of set of things that need to change at a high know, the compensation structure changes. What we track in Salesforce changes. We’re now tracking the individual application workloads, not just the kind of high level contracts progressing. That’s intentional. That lets us really explicitly drive that. And then, yes, there is a bit of a different motion and enablement around that. And so what have we done? We’ve rolled out these new systems, we’ve changed the compensation. We’re kind of managing and driving this, we’ve run through the enablement. That was obviously a big focus in our sales kickoff. So does that mean everything’s done, mission accomplished? Well, no. Now we have to go drive it successfully.
Like any new thing. You got to put all the parts together, turn it into a car and drive the car. So that last bit is kind of the key focus this quarter, and next quarter is really making sure we nail that, that all of this works well in every territory for every rep everywhere in the world. That’s obviously our focus. But in terms of like, well, what how do we feel relative to last quarter? As we talked about this well, obviously a number of things have derisked. Right? Like we rolled out this compensation program, I think it was successful. People understood it. They felt they could make money on this plan. We got the systems and tools built to run the business. So a lot of progress has been made, but there’s obviously still a lot of work to do.
Pinjalim Bora: Yes, understood. That’s helpful. And Jay, want to ask you on Flink, is it possible to understand what portion of your customer base today already uses kind of an open source version of Flink or maybe using Kafka streams on AWS to query?
Jay Kreps: It’s a pretty high overlap. Like any open source stat, it’s an there is, it’s inexact science tracking the usage of open source things. But yes, we had given some adoption stats for Flink. It’s smaller than Kafka is but on a very similar growth trajectory. I think it was a few earnings calls ago. We kind of plotted out the relative adoption of those two projects. So, yes, it’s certainly double digit percentages of the customer base already uses open source plan.
Pinjalim Bora: Understood. Thank you.
Shane Xie: Thanks, Pinjalim. We’ll take our next question from Gregg Moskowitz with Mizuho followed by TD Cowen.
Gregg Moskowitz: Great. Okay. Thank you for taking the questions. Your net new logos were lighter than the typical Q4. Did the self-service activity really slow down and did the upcoming go to market transition to consumption factor into that? Also, it sounded like you had a nice bounce back in that new logos in January. And so, any additional color there would be helpful as well.
Jay Kreps: Yes, I would say this one is, that’s an accurate observation. I would say this one is mostly mechanical. And this is one where the consumption changes did have an impact in Q4. So one of the changes we made in Q4, we incented just kind of the bookings for cloud or platform. Starting in Q1, starting in January, we’re directly incenting both land new logos and expand the kind of consumption off of it. So, yes, if you were going to close a very small new customer in late December, you might want to do it in January because you get paid on it. And so, yes, we did see a bit of a shift there. We’re off to a good start, as we noted in the script in January. And then if we think about the trajectory over the rest of the year, we do think there’s an opportunity to really drive a higher velocity land of customers.
And that’s part of our goal with this consumption transformation. So that’s one of the areas we’re going to be watching to try and see some like significant growth there. Over the course of the year.
Gregg Moskowitz: Very helpful. Thanks, Jay. And then, Rohan, so your subscription gross margins continue to impress. And in fact, your total gross margins are now well above your prior or current, I should say, long-term guidance. Is there anything sort of one time in nature that’s contained within gross margins today, or are you unlocking more efficiency than you maybe had expected previously?
Rohan Sivaram: No, Gregg, that’s a right observation. When you look at our gross margins, we had record gross margins for total gross margins as well as subscription gross margins. And when you just kind of double click into it, the dynamics are as cloud mix over time increases. That’s a headwind to gross margins. And during the same time, our engineering and product teams have done an incredible job in making sure they’re improving the efficiency with which we delivering our products to our customers. And that’s one driver. As we look ahead, I think there’s an opportunity for us to drive a higher multitenant mix in our product, which is obviously going to be a tailwind to gross margins. So looking forward, we expect to be in the, I would say, zip code of 75 plus percent, which is our long term target, gross margins with some puts and takes.
The tailwind is going to be more efficiencies coming through multitenant, and the headwind is going to be as cloud becomes a bigger piece of the mix. So we expect them to offset and be in this range that you see right now.
Gregg Moskowitz: Terrific. Thank you.
Shane Xie: Thanks, Gregg. Our final question today will come from Derrick Wood with TD Cowen. Derrick?
Derrick Wood: Great, thanks. First for you, Jay. I think you guys in the past have talked about Confluent cloud, 60% cheaper than self-managed open source. And we know there’s over 100,000 companies using open source. Kafka, you think in this environment where there’s more focus on spend efficiency, maybe you could see some kind of rising interest on the cloud side. So I guess as you move into 2024, are there any things you’d flag that you’re doing to help drive more open source conversion?
Jay Kreps: Yes, it’s a great observation. Yes, there’s two key things. So I think the observation is right. There’s like, excellent TCO. The two things that we think are critical to get right to raise the volume of conversions. One is this consumption transformation. One of the things that happened in 2023 was, I do think a lot of organizations tamped down on kind of bottom up purchasing. So the interplay between product led growth and the sales team suddenly becomes very important. And that’s a key aspect of how we’ve kind of designed our plan for this year and how we’ve designed the consumption model for Confluent is to make sure that we have the right set up to land customers in our product, convert them over and kind of take them all the way with a little bit of help from the field team.
And I think that’s actually incredibly important in the infrastructure space if you want to be able to land volumes of customers. So that’s the first change. The second change on our side is reducing the kind of friction of adoption. Some of that’s technological. Just how easy is it to get from here to there? Like there may be some savings, but if I’m also reducing my team, do I have the people to actually make the change or make the switch? Part of that is just doing everything we can to make our product a drop in replacement, making it as easy to switch, making that kind of starting cost as appealing as possible, all of that matters a lot to make not just the payoff, but the payoff time really appealing.
Derrick Wood: Great. And Rohan, this was the biggest cloud revenue upside quarter you’ve delivered in nearly two years. Can you just parse out the puts and takes? Did you see notable improvements in consumption in the quarter? Were you overly conservative in your guide? Perhaps with respect to the two large customers you flagged last quarter in terms of headwinds, can you just double click on the outperformance in the quarter and what that’s telling you around consumption trends heading into 2024?
Rohan Sivaram: Yes, I mean of course we were pleased with the results from Confluent cloud we grew 46% and the momentum with which we are exiting Q4 is also showing up in our Q1 guide, which is north of 40% as well, Derrick. Right? So when you look at puts and takes, the first piece I spoke about during in the prepared remarks was just the green shoots around digital native segment. That’s a positive as we head into next year. And outside of that, when you look at our broader customer base in general, we felt the consumption came in line with our expectations and nothing unusual. And, that’s probably the drivers of consumption. And as we enter next year, we were optimistic with respect to, as you can see in our Q1 guide.
Derrick Wood: Thanks. Well done.
Shane Xie: Thanks, Derrick. That concludes today’s earnings call. Thanks again for joining us, everyone. We appreciate it. Take care.
