Snowflake's FY Q1 23 Earnings Call
Summary of Snowflake's FY Q1 2023 earnings call
Revenue: $422.37M (Beat by $9.36M)
Revenue Growth: 84.5%
Q1 GAAP EPS: -$0.53 (Missed by .02)
Net Revenue Retention: 174%
Total Customers: 6,322
New $1 million customers: 11
Total Customers with TTM Product Revenue Greater than $1 million: 206
Product Gross Margin: 75%
Adjusted Free Cash Flow Margin: 43%
I felt that the sell-side analysts asked too many short-term oriented questions on the call. These short-term questions were related to macro headwinds and how they are affecting the consumption/spending patterns of Snowflake’s customers. Snowflake’s management seemed a little irritated at the constant repeating of these types of short-term questions, especially since they clearly aren’t short-term focused. I guess the analysts are technically doing their job, so it’s hard to blame them.
Snowflake’s management is long-term focused though, with a focus on free cash flow and not quarterly EPS. FY 2029 is a meaningful long-term target for Snowflake since that is where they’re guiding for $10B of product revenue and 25% adjusted free cash flow margin.
In full disclosure, I own shares of Snowflake at the time of writing.
Here is my summary below:
Snowflake’s CEO mentioned how there previously wasn’t enough money and time in a day to ingest large volumes of data and perform processes to make the data consumable and to analyze it. Snowflake, along with the public cloud infrastructure (AWS, GCP, Azure), changed this.
Here are two quotes from the call that give an idea what Snowflake does:
“Data has to be transformed and transported to systems that produce the reports and dashboards that make sense out of transactional and operational data. There wasn’t enough time or money in the day to ingest ever larger volumes of data and perform long-running processes to make the data consumable and analytics ready. The public cloud infrastructure, coupled with cloud-native data platforms like Snowflake, broke the back of these laboring systems with tremendous scale, performance and economics.”
“Prior to the data cloud, data was copied, transferred and replicated to be used wherever it was needed. That had led to rivers of data moving 24/7 causing operational complexity, cost and governance risk. The Snowflake Data Cloud holds the promise to bring that undesirable legacy to an end. Data stays put on the data cloud, and our workload enablement ensures that customers can have their needs met in terms of data engineering, data warehousing, data lake, data science, data analytics and data application development.”
During the quarter, Snowflake closed its acquisition of Streamlit, which allows developers to build apps.
Snowflake Data Marketplace allows companies to create data sets and make them available to other Snowflake users for purchase. Frank said that they now see monetization in public preview for this. (Snowflake Data Marketplace presents a huge network-effect opportunity)
Listings on Snowflake Data Marketplace grew 22% quarter-over-quarter.
Snowflake has $5 billion in cash, cash equivalents and investments with no debt.
There were some headwinds during the quarter. Snowflake’s CFO mentioned that some customers consumed less than they expected due to the economy. These customers are still growing though.
There will be some fluctuations quarter-to-quarter, but it won’t detract from Snowflake’s long-term opportunities since the overall demand for its product hasn’t changed.
There was a sequential decline in remaining performance obligations during the quarter because of tough comparisons from the previous quarter.
On the call, Snowflake’s CFO said:
“I would like to update our fiscal year 2029 targets. For fiscal year 2029, we are reiterating our target for product revenue of $10 billion, growing 30% year-over-year. We are increasing our margin targets and now expect on a non-GAAP basis approximately 78% product gross margin, 20% operating margin and 25% adjusted free cash flow margin.”
This is encouraging because its shows a path to profitability, 20% is a satisfying operating margin, and they increased the adjusted free cash flow margin guidance from 15% to 25%. Keep in mind that this is adjusted FCF though which is important because Snowflake has been adding back stock-based compensation (SBC) to cash flow and SBC has been high. Stock based compensation probably shouldn’t be added back since it acts as a form of employee compensation that Snowflake has to pay in order to entice the top engineers to work for them as opposed to their competitors.
Snowflake’s CFO, Michael Scarpelli, mentioned that they are being cautious going into the full year due to macro headwinds.
And keep in mind that management has erred toward caution in the past. Michael mentioned that they were “probably too conservative last year” when answering a question on why adjusted free cash flow margin was revised from 15% to 25%.
There were many questions surrounding the macro headwinds and how they affected Snowflake. Management didn’t seem content about these questions, especially since I felt the analysts on the call were asking the same question in a different way. There was even a part on the call where an analyst tried to guess which of Snowflake’s customers were the ones decreasing consumption.
Snowflake’s CFO mentioned they’re focused on free cash flow and they will continue to invest heavily in R&D while being efficient and showing leverage in their model.
Snowflake is setting themselves up for the next 10, 20 years.
Snowflake’s CEO mentioned that Snowflake’s business is not a commodity. Michael backed this up by saying, “I’m not aware of a single customer, a significant customer opportunity we’re going after where we lost it over pricing – not a single one.”
Around 94% of Snowflake’s revenue comes from existing customers at the start of the year.
It takes 6 months to a year to ramp up new clients on their platform. Therefore, it takes some time for the revenue from new customers to show up.
The federal government and public sector are potential opportunities since they are not well penetrated there.
Snowflake could acquire some smaller companies with good teams and good technology following the recent valuation reset in private companies.
Net revenue retention won’t stay at this very high rate. Management expects it to come down but they foresee it remaining well above 130% for a long time.
I don’t see this last part as a concern since this is a natural process of growing and getting bigger.