Snowflake Inc. (SNOW) Q3 2023 Earnings Call Transcript

Snowflake Inc. (NYSE:SNOW) Q3 2023 Earnings Call Transcript November 30, 2022

Snowflake Inc. beats earnings expectations. Reported EPS is $0.11, expectations were $0.04.

Operator: Good afternoon, and thank you for attending today’s Snowflake Q3 Fiscal 2023 Earnings Conference Call. My name is Austin, and I will be your moderator for today. I would now like to pass the conference over to our host, Jimmy Sexton, Head of Investor Relations with Snowflake. Jimmy, please go ahead.

Jimmy Sexton: Good afternoon, and thank you for joining us on Snowflake’s Q3 fiscal 2023 earnings call. With me and both in Montana are Frank Slootman, our Chairman and Chief Executive Officer; Mike Scarpelli, our Chief Financial Officer; and Christian Kleinerman, our Senior Vice President of Products, who will join us for the Q&A session. During today’s call, we will review our financial results for the third quarter fiscal 2023, discuss our guidance for the fourth quarter and full year fiscal 2023 and discuss our fiscal 2024 outlook. 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 and overall future prospects.

These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those 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 July 31, 2022, and the Form 10-Q for the quarter ended October 31, 2022, 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 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 in 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, and good afternoon, everybody. Snowflake continues to drive strong growth at scale, coupled with strengthened unit economics, operating profit and free cash flow. While we acknowledge the weakening global macro context, we remain resilient in terms of our results. We believe this resilience reflects the importance of data strategy in modern enterprises and institutions. Data is becoming deeply ingrained in how global enterprises think, act, decide and strategize. Relying on anecdotal observations will increasingly take a back seat to data-driven operations. The company is reporting $523 million in product revenue, growing 67% year-on-year. Our remaining performance obligations, or RPO, grew 66% year-on-year to $3 billion.

On a non-GAAP basis, product gross margin came in at 75%, operating margin at 8% and adjusted free cash flow margin at 12%. Snowflake’s Data Cloud strongly resonates in large enterprises and institutions. The idea of getting your data siloed again in the public cloud stack holds limited appeal. Data Cloud maximizes the power and promise of data science and artificial intelligence, a high priority in the modern enterprise. In the quarter, we added 28 Global 2000 customers. Product revenue from the Global 2000 outpaced the company as a whole, growing 14% quarter-over-quarter. Global 2000 customers now represent over 40% of revenue. Our mission is the Data Cloud, a single data universe across geographies, data sources, compute clouds and cloud regions, a single point of inquiry, analytics and intelligence, maximum enablement of data sciences, analytics and intelligence.

Today, Snowflake operates across 37 regional deployments. Year-over-year, we’ve expanded our footprint by more than 30%. Customers are embracing this vision. 22% of customers have at least one stable edge, up from 17% a year ago. 66% of customers with over $1 million in trailing 12-month product revenue have at least one stable edge. Snowflake’s marketplace listings grew 11% quarter-over-quarter, now with more than 1,700 data listings. Our strategy is a global data sharing network, coupled with unlimited workload enablement. Work needs to find its way to the data instead of the historical habit of moving data to the work. Much of the work in the announcements you’ve seen from Snowflake in recent years reflects our progress in and across the workload spectrum from data engineering to data warehousing to data science to data applications and transaction processing.

We recently announced the general availability of Python for Snowpark. This is foundational for many workloads and user types. Global 2000 customers, Charter Communications, EDF Energy and Northern Trust have adopted Snowflake for Python. Earlier next year, we will offer native Streamlit integration in private preview. With Streamlit, we’re helping developers and data engineers build applications in Snowflake. Since acquisition, the Streamlit community has grown more than 60% and now has approximately 70,000 developers. We’re enabling data science workloads with Snowpark optimized workhouses — warehouses, now in public preview. Optimized warehouses represent a step function improvement for compute-intensive workloads and allow customers to bring ML training into Snowflake.

In Q3, we hosted our Data Cloud World Tour, which brought our product announcements to a global audience. We travelled to 18 cities across 12 countries and reached over 12,000 attendees. In November, we hosted our Annual Developer Conference BUILD, a virtual kickoff at over 4,000 attendees and local breakouts are scheduled in 16 cities across 10 countries. Aside from world-class scale performance and economics, Snowflake differentiates with a relentless focus on enterprise-grade high trust implementation, for security and compliant capabilities enable the largest enterprises and institutions worldwide to deploy Snowflake for the most critical use cases and applications. Privacy and compliance, of course, have become far greater challenges in recent years and created new challenges in data operations.

For example, our data clean room operations, which originated in the role of advertising, are now spreading to other vertical industries. Snowflake continues to deepen and strengthen its industry orientation. We expect to understand our customer challenges, solve their problems and speak their language, leading industries for Snowflake are financial services, advertising, media and entertainment, followed by retail and consumer packaged goods, technology and healthcare and life sciences. In Q3, product revenue from the financial services industry grew 13% quarter-over-quarter. Financial services client, The Depository Trust & Clearing Corporation, or DTCC, recently announced their use of Snowflake Marketplace. Providing clearing and settlement services, DTCC has access to a vast amount of training data.

DTCC allows clients to engage with its data through Snowflake to better understand market liquidity and investor sentiment. During the quarter, at advertising week, we announced an investment in OpenAP, the advanced advertising company. This will accelerate the development of the OpenAP Data Hub, which is a new cross-publisher and cross-platform clean room solution for the television industry powered by Snowflake. The addition of Snowflake validates the commitment FOX, NBCUniversal, Paramount and Warner Bros Discovery have made to transforming the TV ad industry. We are aware of the weakening macro economy. Customer behavior informs our outlook and investment approach. In Q3, we demonstrated our ability to execute through different economic environments.

Our focus remains on revenue growth balanced with free cash flow generation. We are well positioned to drive efficient and durable growth, which Mike will discuss further. The opportunity ahead is massive and will take years to unfold. With that, I will turn the call over to Mike.

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Mike Scarpelli: Thank you, Frank. Q3 product revenues were $523 million, representing 67% year-over-year growth, and our remaining performance obligations grew 66% year-over-year totaling $3 billion. Of the $3 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months. This represents a 68% increase compared to our estimate as of the same quarter last year. Our net revenue retention rate of 165% includes 14 new customers with $1 million in trailing 12-month product revenue and reflects durable growth among our largest customers. With a focus on the acquisition and growth of the largest enterprises in the world, we added 28 Global 2000 customers in the quarter, our largest quarterly addition in the last five periods.

We have confidence in our growth opportunity in these accounts because G2K customers only represent $1.3 million of trailing 12-month product revenue on average. This compares to an average of $3.7 million among customers over $1 million in product revenue. We will continue to grow these accounts through value selling and workload enablement. We are seeing this in our largest accounts today. Quarter-over-quarter, six of our top 10 customers grew faster than the company overall. We are monitoring our key business metrics, which we believe are leading indicators of the macro economy impacting our business. In the quarter, we saw varying degrees of strength and weakness worldwide, making it challenging to identify a consistent trend. Our largest segments, North America and EMEA outperformed SMB and APJ, the strength in North America includes the headwind from the consumer Internet companies we mentioned earlier this year.

This shows the resiliency of Snowflake as enterprises continue to prioritize data operations. Taking a closer look at specific industries, financial services, our largest vertical, grew faster than the company overall while advertising and media entertainment grew slower, technology as a sector underperformed in the quarter. Each geography and vertical had unique circumstances in the quarter, which will always happen with the consumption model. With that being said, Q3 results reflect strong consumption overall. While we did experience a foreign exchange revenue headwind in the quarter, less than 5% of our revenue is invoiced in currencies other than the U.S. dollar. At the moment, we do not evaluate our business on a constant currency basis given the immateriality.

Now turning to margins on a non-GAAP basis. Our product gross margin was 75%. Scale in our public cloud data centers and continued growth in large customer accounts contributed to year-over-year gross margin improvement. Operating margin was 8%, benefiting from revenue outperformance and favorability on headcount and marketing spend. Our adjusted free cash flow margin was 12%, positively impacted by strong collections. We ended the quarter in a strong cash position with $4.9 billion in cash, cash equivalents and short-term and long-term investments. Now let’s turn to our guidance. We remain committed to driving towards greater profitability. We are focused on revenue growth through expanding operating and free cash flow margins. Over the past six weeks, we have seen weaker consumption in APJ and SMB segment.

However, recent consumption patterns give us confidence that our largest and most strategic customers will continue to grow. With the holidays approaching and uncertainty with how customers will operate, we believe taking a more conservative approach is responsible as we resource plan for Q4 and fiscal 2024. Even with slower-than-expected growth, we are committed to generating meaningful free cash flow. For the fourth quarter, we expect product revenue between $535 million and $540 million, representing year-over-year growth between 49% and 50%. Turning to margins. We expect on a non-GAAP basis, 1% operating margin, and we expect 360 million diluted weighted average shares outstanding. For the full fiscal year 2023, we expect product revenues between $1.919 billion and $1.924 billion, representing year-over-year growth between 68% and 69%.

Turning to profitability. For the full fiscal year 2023, we expect, on a non-GAAP basis, approximately 75% product gross margin 3% operating margin and 21% adjusted free cash flow margin, and we expect 359 million diluted weighted average shares outstanding. Year-to-date, we’ve added over 1,500 net new employees. We view the current hiring market as favorable for Snowflake and we’ll continue to focus hiring in product, engineering and sales. While we are currently in our planning cycle, we would like to discuss next year’s growth outlook based on the consumption we are seeing today. For the full fiscal year 2024, we expect product revenue growth of approximately 47% and non-GAAP adjusted free cash flow margin of 23% and continued expansion of operating margin.

This outlook includes a slowdown in hiring, which we evaluate on a monthly basis, but assumes adding over 1,000 net new employees. Our long-term opportunity remains strong, and we look forward to executing. With that, operator, you can now open up the line for questions.

Operator: Our first question is with Raimo Lenschow from Barclays.

Raimo Lenschow: My question was, as you think about next year, how should we think about existing customers versus new customers? You obviously had a record new customer adds. What are you seeing in terms of customers’ willingness to (ph) it like normally in the olden days in people would stay with the incumbent in tough times and just batten down the hatches, et cetera. It seems to be different for you. So could you speak a little bit of what you’re expecting new customers versus existing customers in the guidance?

Mike Scarpelli: Yes. Well, Raimo, in terms of — from a revenue perspective, most of the revenue is really driven by our existing customers because it takes customers time to get their data into Snowflake and ramp up production. But with that said, we’re still very much focused on landing new customers. It’s not really the quantity. It’s the quality of new customers. We tend to focus very much on the largest enterprises and Global 2000 is one of the metrics that we give. But it’s not just Global 2000, it’s large public sector clients as well as a lot of the big private companies in the world as well, too. And so we’re going to continue to do that. And as you can see by the Global 2000, they’re still willing to do — bring in new vendors.

Operator: Our next question is with Kirk Materne from Evercore.

Kirk Materne : Mike, you mentioned that there weren’t any patterns or stuff to decipher just given you guys are across a number of different verticals and geographies. But I was curious in the verticals that are doing well, like financial services and the like are you starting to see that the network effects that come along with Snowflake are really helping those verticals do well despite the macro backdrop. It’s just interesting to note that your stable edges are up. And I expect those verticals where you’ve really built out industry-specific functionalities playing out and perhaps those customers are able to grow faster just because they’re more locked in across the entire industry. Can you just talk about that?

Mike Scarpelli: Yes. Well, I’ll start and then I’ll let Frank. Well, clearly, the network effect is important, and we really do see that in financial services, which have the biggest concentration of stable edges. And you can see that in the outperformance of financial services. But definitely, we are seeing the network effect and it’s really the data sharing is one of the things that — things that is driving that.

Frank Slootman: Yes. The other thing, Kirk, is every industry has its own unique set of dynamics that we call in other words, things that are driving data networking relationships between entities. For example, in healthcare, it’s through relationships between payers and providers, in media and entertainment, there’s enormous amount of data sharing going on there in terms of consumer packaged goods, the advertisers, retailers and so on. So they’re all a little different. As Mike said, financial is very much driven by the fact that historically in financial services institutions are pumping massive amounts of data around every single night to all these different destinations, especially in asset management and subsectors like that.

So we really view — I mean, data network in plays out differently in every industry sector and subsector, but they become — there’s a lot of data gravity is what we call it that starts to happen that benefits us enormously. It really lowers the friction of getting access to new accounts, and you see that very pronounced in verticals like financial services.

Operator: Our next question is with Keith Weiss from Morgan Stanley.

Sanjit Singh: This is Sanjit Singh for Keith. I wanted to go back, Mike, to some of the guidance framework that you laid out for us, particularly with respect to fiscal year ’24, I think you talked about 47% growth. Is there any way you can sort of draw the bridge for us in terms of next quarter you’re guiding to think about 49% at the high end; and then for the full year next year, approximately 47%. What sort of gives you the confidence that your Q4 exit growth rate is going to be durable going into next year?

Mike Scarpelli: Sure. Well, I’ll say Q4 is — it is a quarter that has a lot of holidays in it, and we do think we’ve lived through COVID that people are traveling more. There is a big human component as well, too. So we all along have been forecasting that Q4, we’d see the impact of that, but we also have a number of significant customers that we have signed up, that we see them ramping up next year on Snowflake as well as some of the things we’re doing with Snowpark with Python, we’re starting to see traction in that as well, too. But we think that’s going to be more of a 2024 impact.