Snowflake Earnings: “I don’t see any of our customers that are fully saturated”

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posted very strong Q2 2023 earnings after the close on 8/24/2022. The stock is currently up 18% pre-market to $188/share. Our cost basis is $152.71 so we’re up around 23%.

Some might be wondering if I’m planning to trim or lock in profits. The answer is no and no. I see a 10+ year opportunity for . If they continue to execute well and aren’t disrupted, I believe it would be a huge mistake for me to sell up 23%. That’s nothing compared to the compounding that can take place over 10+ years.

I’m not going to just blindly own the stock. I will watch it from quarter to quarter, but I’m not watching the stock price (unless it gets excessively cheap or expensive). I’m watching the business and looking for signs that they are continuing to innovate, gain market share or are potentially being disrupted by competition.

So lets get to it.

Lets start by looking at the guidance management provided for this quarter in their Q1 2023 earnings release.

Q2 2023 Guidance was:

Product revenue: $437.5M (+72% YoY)

Non-GAAP operating margin: -2%

Full-year FY 2023 Guidance was:

Product revenue: $1.893B (+66% YoY)

Non-GAAP Gross margin: 74.5%

Non-GAAP Operating margin: 1%

Adj free cash flow margin: 16%

Q2 2023 Results:

Product revenue: $466.3M (+83% YoY), beat guidance by $29M

Non-GAAP Gross margin: 75% (slightly above full year guide of 74.5%)

Non-GAAP operating margin: 4%, beat by 600 basis points

Adjusted free cash flow margin: 12%

Q3 FY 2023 Guidance:

Product revenue: $502.5M (+61% YoY)

Non-GAAP Operating margin: 2%

Updated Full-year FY 2023 Guidance:

Product revenue, $1.910B (+67.5% YoY), increased by $7M.

Non-GAAP product gross margin: 75%, increased 50 basis points

Non-GAAP operating margin 2%, increased 100 basis points

Non-GAAP adjusted free cash flow margin: 17%, increased 100 basis points

MY TAKEAWAY

This was a beat and raise which has become the norm for this management team. They are very experienced and excellent at execution. The stock has fallen a lot this year but it’s because the valuation got out of hand, not because the business was struggling.

I don’t pay much attention to daily stock moves, but the initial response of +18% after hours shows Wall Street feared they’d either miss numbers this quarter and/or lower guidance like many other companies we have seen.

They are also maintaining their planned hiring which shows great planning as well as a strong demand forecast because headcount is the company’s largest expense in terms of investing in future growth.

The people they are hiring are focused on research and development and sales. The fact that is able to stay aggressive while so many other companies are forced to be conservative is a testament to their extremely strong balance sheet and it’s exactly how great companies get stronger during down turns.

EARNINGS PRESENTATION SLIDES

I’ll share a few slides here that help emphasize important aspects of SNOW or highlights from the quarter.

This is a great visualization of what management believes to be the big “unlock” of the data cloud. There are almost endless ways businesses can collaborate with their customers and other businesses. This has an incredibly high ROI for management teams because they’ve now exponentially increased their access to data without having to invest in more servers or hire more people

These next two slides are remarkable given that SNOW is an annual run rate of roughly $2B in revenue.

Lets focus on the 171% net revenue retention. Revenue from existing customers alone grew 71% YoY. I don’t know of another enterprise software company that has ever had net revenue retention that high at this size.

Customers spending $1M+ in product revenue grew by 40 this quarter to 246. This was the company’s strongest quarter yet in this metric.

SNOW also landed 476 new customers in the quarter bringing the total customer count to 6,808.

New customer acquisition and % of total customers that spend over $1M in product revenue are important metrics to track so lets dig in for a second.

Here is how total customer growth and % of customers that spend over $1M has looked for the last 4 quarters. These numbers combined with its very high net retention rate show no signs of slowing down.

Total Customer growth % of customers that spend over $1M

Q2 FY23: 476 3.6%

Q1 FY23: 367 3.25%

Q4 FY 22: 535 3.08%

Q3 FY 22: 434 2.32%

Equally as important as revenue growth, SNOW is getting more efficient as they grow. This is what investors should expect as companies mature. They find efficiencies.

And finally a reminder, management has laid out their FY 29 targets. They have increased target gross margin, operating margin, and adjusted free cash flow margin since they initially published this. Notably, they did not increase the FY 29 revenue target of $10B.

When asked why they increased the margin targets, but not revenue the CFO replied with something along the lines of saying “we wanted to leave something to talk about during our investor day in 2023”.

I wouldn’t be surprised if they increase that target to $15B or even $20B at their next investor day (June 2023) depending on the macro environment at that time.

SUMMARY

That’s all for now. This was a very strong quarter and Snowflake has some big new products being released at the end of this year that will begin impacting consumption (and revenue) next year. They’re in a position to stay aggressive while most others are being conservative, they have one of the best management teams in the game, and they have tailwinds from one of the fastest growing industries (operationalizing data) at their backs.

I’ll probably cover Q&A notes in a separate email. Trying to keep these shorter!