Ya hate to see it.
[What happened? Pre-released an 8-K bmo reporting topline above, missed RPO, guide topline below for 1Q, guiding 30% y/y for CY23 vs Street was looking for 33%, taking out 8% of headcount, aim to be break-even by F4Q, call still Monday AMC but they needed to disclose now bc of the headcount reduction. #s imply 4% y/y RPO Billings growth - admittedly against impossible comp of 111% y/y growth - and 20% y/y cRPO Billings also against tough 82% y/y comp in 4Q21.]
What now? Let's just gut check back to some select comments from employees leading up to this reduction:
- "Good Tech Stack" 12/22
- "OSS Kafka needs management. Product is good...Many orgs bloated and filled with poor hires. 10% of people do 90% of the work." 12/22
- "Product led growth strategy seems viable. Competition is yet to catch up...Recently seeing a lot of red tape culture. Leaders especially on the product and engineering side exiting the company." 11/22
- "interesting problems to solve...hiring bar steadily decreasing...people org is a mess" 11/22
We are editing in our favor a bit (and for time) but this look still reads + on product and opportunity but messy on headcount and operations and culture. The latter 3 can turn into bigger and bigger problems if not rooted out. This is where the entire software industry is today; great growth behind them, potentially large markets still ahead for some, but OPEX cuts and caution required in the near term.
There is a telling (and potentially apocryphal) story about the CEO's message in private meetings back at a sellside conference in May 2022. At the conference, investors were recommending to the CEO/founder of CFLT that he stop hiring and batten down the hatches ahead of a tougher period for growth. To which the CEO reportedly answered that he had '6 months' of incredible visibility and a once in a generation opportunity to build and own an important layer of the technology stack. As an investor we marveled at the confidence but we knew: when weak macro conditions arrive nothing is sacred. This morning's revelation is confirmation that Macro knocks down all bowling pins, and even sacred growth stories are made into commonplace or profane cyclical situations.
The stock is way ahead of this conclusion. The first tough comp in sequential cRPO growth was the March-Q of 2022. Which means that in 90 days when CFLT reports the company will begin to hit easier comparisons on a key metric, and from there investors can start to make reasonable assumptions about medium term growth rates for the company. (Reporting both 111% y/y and 4% y/y RPO Billings in the last 5 quarters can create a lot of confusion when trying to think about sustaining growth opportunities.) The setup now is: 90 days to easier cRPO comps, still pretty deeply negative FCF with a trajectory out of the muck by late 2023, and the stock is ~7x NTM revenue.
We love it. Kafka is enormous. Monetization into CFLT is nascent in comparison. Sure, there are other ways of building things, but they are niche/minority. Kafka adoption is still growing (and should). Conversion to CFLT is in the 3rd inning. But there is still another 10-20 years of value that CFLT can create on top of the message queue.
Negatives we think about: funnel growth tightened up in summer 2022, in a looser labor market perhaps companies will prefer to continue to throw bodies at Kafka rather than eliminate labor and pay for CFLT, and sustaining growth rate for 2023-2024 may still be closer to guesswork than solid visibility.
Let's get past the near term pain of macro, and this is one of the duration growth winners.
