Snowflake Inc. (NYSE:SNOW) Q2 2024 Earnings Call Transcript

Snowflake Inc. (NYSE:SNOW) Q2 2024 Earnings Call Transcript August 23, 2023

Snowflake Inc. beats earnings expectations. Reported EPS is $0.22, expectations were $0.09.

Operator: Good afternoon, and thank you for joining the Snowflake Q2 Fiscal Year 2024 Earnings Conference Call. My name is Kate, and I’ll be the moderator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the call over to your host, Jimmy Sexton, Head of Investor Relations at Snowflake. You may proceed.

Jimmy Sexton: Good afternoon, and thank you for joining us on Snowflake’s Q2 fiscal 2024 earnings call. With me in Bozeman, Montana are Frank Slootman, our Chairman and Chief Executive Officer; Mike Scarpelli, our Chief Financial Officer; and Christian Kleinerman, our Senior Vice President of Product, who will join us for the Q&A… [Technical Difficulty]

Operator: Excuse me, ladies and gentlemen, it does look like the speakers have disconnected. One moment while we get them reconnected. [Operator Instructions] Ladies and gentlemen, we have the speakers back in the call. You may proceed with the presentation.

Jimmy Sexton: Good afternoon, again, and thank you for joining us on Snowflake’s Q2 fiscal 2024 earnings call. With me in Bozeman, Montana are Frank Slootman, our Chairman and Chief Executive Officer; Mike Scarpelli, our Chief Financial Officer; and Christian Kleinerman, our Senior Vice President of Product, who will join us for the Q&A session. During today’s call, we will review our financial results for the second quarter fiscal 2024 and discuss our guidance for the third quarter and full year fiscal 2024. During today’s call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, products and features, long-term growth, our stock repurchase program, and overall future prospects.

These statements are subject to risks and uncertainties which could cause them to differ materially from actual results. Information concerning these risks is available in our earnings press release distributed after market close today and in our SEC filings, including our most recently filed Form 10-Q for the fiscal quarter ended April 30, 2023, and the Form 10-Q for the quarter ended July 31, 2023, that we will file with the SEC. We caution you to not place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events, or changes in our expectations. We’d also like to point out that on today’s call, we will report both GAAP and non-GAAP results.

We use these non-GAAP financial measures internally for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons. Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non-GAAP financial measures, please refer to our earnings press release distributed earlier today and our investor presentation, which are posted at investors.snowflake.com. A replay of today’s call will also be posted on the website. With that, I would now like to turn the call over to Frank.

Frank Slootman: Thanks, Jimmy. Welcome, and good afternoon. Q2 product revenue grew 37% year-over-year to reach $640 million. Non-GAAP product gross margin expanded to 78%. And non-GAAP adjusted free cash flow was $88 million, representing 50% year-over-year growth. In Q2, we continued to execute in an unsettled macro environment, but with incremental improvement in general sentiments and engagement. Generative AI is at the forefront of customer conversations. However, enterprises are also realizing that they cannot have an AI strategy without a data strategy to base it on. We have a head-start in this race, with the epicenter of highly curated, optimized and trusted enterprise data. We now have a presence was 639 Global 2000 customers.

AI reaches beyond enterprise boundaries. Models need external data to answer challenging questions. Data sharing makes Snowflake uniquely positioned to enable AI workloads. As of Q2, 26% of Snowflake customers are data sharing, up from 20% in the same period last year. Approximately 70% of customers with more than $1 million in trailing 12-month product revenue are data sharing with an average of six stable edges. For years, we focused on the programmability of our platform via Snowpark. We are seeing momentum. In Q2, we added more than 400 Snowpark customers and our consumption grew approximately 70% quarter-over-quarter. The 63% of our Global 2000 customers are using Snowpark on a weekly basis. Document AI is now in Private Preview. With Document AI, customers can use natural language to ask questions of unstructured data.

Legal contracts or invoices are now available for inquiry and analytics. This is an early example of how language models are expanding our opportunity. With Snowflake Container Services, we are bringing LLM models like Reka and NVIDIA’s NeMo into Snowflake. You heard in my conversation with Jensen, Snowflake is sitting on a goldmine of data. Together, we can help customers turn that goldmine into intelligence. We announced Snowpark Container Services two months ago. Since then, hundreds of customers have requested access to the Private Preview. With our support of Iceberg Tables, we are expanding our data lake scope. Many customers already use Snowflake as a data lake. Large financial services customer consolidates data in Snowflake to eliminate useless extract and transfers of data.

This means new use cases are deployed 80% faster. Iceberg Tables will bring additional scope in open file formats to Snowflake. We expect to unlock more data lake opportunities with these capabilities. We’ve also reached an inflection point on the applications front. At Summit, we launched so-called Native Apps in Public Preview. And we have over 25 native application providers today. Snowflake is a save, certified, and sanctioned place to deploy applications. Grassroots support is building. We now have more than 145,000 monthly active developers on Streamlit. This represents an increase of 160% year-on-year. Our start-up program allocates resources to developers planning to build on Snowflake. Approximately 20% of new customers landed in Q2 landed on Snowflake through our start-up program.

General sentiment appears to be incrementally getting better. Snowflake Summit in June was highlight of energy and excitement about what is becoming possible in the world of data. We hosted over 20,000 on-site and virtual attendees. This was up over 85% from last year. Next up is our Data Cloud World Tour. The World Tour brings Summit messaging to a wider audience. We expect to double the attendance of Summit. This is in 26 cities worldwide. With that, I’ll turn the call over to Mike.

Mike Scarpelli: Thank you, Frank. Consumption came in line with our expectations for the quarter. In May, we saw a return to growth with strength continuing into June and July. From a booking standpoint, we saw promising signs of stabilization with new bookings outperforming our expectations. However, we believe, productivity has room for further improvement. Q2 remaining performance obligations grew 30% year-over-year, totaling $3.5 billion. Of the $3.5 billion in RPO, we expect approximately 57% to be recognized as revenue in the next 12 months. This represents a 32% increase compared to our estimate as of the same quarter last year. Our net revenue retention rate of 142% includes six new customers with $1 million in trailing 12-month product revenue.

We now have 402 customers with trailing 12-month product revenue greater than $1 million. We continue to focus on growth and efficiency. We generated $88 million in non-GAAP adjusted free cash flow, outperforming our Q2 target. Q2 represented another quarter of continued progress on profitability. Our non-GAAP product gross margin was 77.9%, benefiting from a one-time credit from one of our cloud service providers. Non-GAAP operating margin was 8%, benefiting from tight controls on headcount additions and the over-achievement in product gross margin. Our non-GAAP adjusted free cash flow margin was 13%. We continue to have a strong cash position with $4.9 billion in cash, cash equivalents, and short-term and long-term investments. We did not repurchase any shares in the quarter, but plan to opportunistically repurchase shares using our free cash flow.

Now let’s turn to guidance. Our forecast assumes that our largest customers will continue to be a growth headwind. We are seeing encouraging signs of stabilization, but not recovery. Our forecast calls for these customers to more closely align their consumption with their annual contract value. For the third quarter, we expect product revenues between $670 million and $675 million, representing year-over-year growth between 28% and 29%. Turning to margins, we expect, on a non-GAAP basis, 4% operating margin. And we expect 364 million diluted weighted-average shares outstanding. For the full year fiscal 2024, we expect product revenues of approximately $2.6 billion, representing year-over-year growth of approximately 34%. Turning to profitability.

For the full year fiscal 2024, we expect, on a non-GAAP basis, approximately 76% product gross margin, 5% operating margin, and 26% adjusted free cash flow margin. And we expect 362 million diluted weighted-average shares outstanding. We will continue to prioritize hiring in product and engineering. We still expect to add approximately 1,000 employees in fiscal 2024, inclusive of M&A. With that, operator, you can now open up the line for questions.

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Q&A Session

Operator: Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question will be from the line of Keith Weiss with Morgan Stanley. Your line is now open.

Keith Weiss: Excellent. Thank you for taking the question, guys. Mike, I wanted to dig into the comment about kind of a large customer activity. You talked to us about sort of consumption coming more in line with the committed contracts. Can you give us any visibility what’s happening on the contract renewals? Because as you go through these big contract renewals, are you seeing any change in their behavior of what the large customers are willing to commit to you? And any impacts that we should be thinking about on how that’s going to impact bookings and sort of RPO on a go-forward basis?

Mike Scarpelli: Yes. No, we’re seeing customers renew. This quarter was a good renewal quarter. We had our largest customer, they renewed under their existing terms. They did a $100 million three-year renewal, even though their revenue run rate is at a higher amount than that. I think we did $9 million or $10 million plus TCV deals this quarter and most of those were renewals. And so, customers are doing that. But remember, that doesn’t necessarily equate to consumption, and we do know some of our largest customers are trying to consume at their contract rate rather than going above that.

Keith Weiss: Got it. So, the dynamic is really on consumption, it is not on contracting as of yet?

Mike Scarpelli: No. It’s around consumption. As I said, the contracting, actually feel the sentiment really just seems to change in July with customers really re-engaging with us. And so — and I think we’ll have good bookings, but that doesn’t equate to consumption. It takes time for the consumption to come in.

Keith Weiss: Got it. And then, if I can sneak one in for Frank as well. You talked about, you need a good data strategy to have a good AI strategy and that’s something we hear a lot when we’re talking to customers and people out there in the field. So that really resonates. When it comes to kind of go-to-market and sort of the selling motion, does having to have the gen AI conversation while a long-term positive, does that disrupt the sort of typical kind of data cloud discussion that you guys have been having for the past like five years with these customers? Does it have that risk or has it been elongating the sales cycles in a real way?

Frank Slootman: No. I would say so, Keith. I think we were actually saying that having highly organized optimized, trusted, sanctioned data is incredibly important for deploying large language models. If you think you can just drop a model on top of a data lake and just see what happens, that’s not going to end well and that’s what people are realizing. So, they really got to get super serious about their foundations, before — if you don’t have a good foundation, there’s not much you can build on top of that. There’s tons of governance issues involved as well. We spent literally decades as an industry making data highly governed. In other words, who can have access to what. So that now needs to translate into the world of large language models as well.

So, there’s tons of questions that are coming up that are really important for the enablement of language models and AI generally. So, being extremely organized on your data is going to become a premium thing. And we’re obviously — that’s — we’ve been on that, but it has become more important as a function of this.

Keith Weiss: Got it. Yes, it definitely resonates with the competition we’re having as well. So, thank you very much for the time guys.

Operator: Thank you. The next question will be from the line of Mark Murphy with JPMorgan. Your line is now open.