SNOW Q4 FY23 Results & Analyst Q/A

[sjo]

SNOW Q4 FY23 Analyst Q/A 02/22/2023

Frank Slootman, CEO
Michael Scarpelli, CFO
Christian Kleinerman, SVP Product

SInce this is the first board post re: SNOW’s results, I’ve attached the earnings release press release and slide show at the end of this post.

The CFO stated the following response several times, and sounded short/frustrated by analyst’s questions after stating this re: the reason for the slowdown:
Younger customer cohorts coming into SNOW are ramping at a slower pace than the original SNOW consumers previously ramped. These newer customers are ramping consumption, just at a lower rate. As base gets bigger, growth naturally slow down. Customers are still consuming.

Q Insights into consumption patterns during the holiday weekend, MLK and Presidents day.
A Nothing really noteworthy. Were 3% above their guidance. Feb was slow, but March was off to a fast start.

Q AI chat logs, social media feeds, etc.
A Very pragmatic view. Snowflake language will help greatly in this regard.

Q International underperformance. How they’re consuming vs. US
A Customers being more cautious and buying as they consume. Japan historically has done this. Did see in North America, customers who had consumed their existing consumption and they extended and kept consuming.

Q Shared edges w/ financial co’s and telco’s.
A SNOW’s largest customers are telcos. Running massive amounts of data. Telcos are their biggest consumers.

Q Color re: overall guide -what’s baked in and what’s changed?
A Younger customer cohorts coming into SNOW are ramping at a slower pace than the original consumers. They are ramping consumption, just at a lower rate. As base gets bigger, growth naturally slow down. Customers are using SNOW more efficiently, consumption is more methodical, but not seeing customers decrease their spend in any material way, just growing at a slower pace. Partners who have been using SNOW for some time are getting better at migrations and that’s also part of slowing down SNOW’s revenue growth.

Q Slowing?
A We have a rep productivity issue in some of our international markets. Large enterprises are going strong, but will be doing things to get reps more productive during this year.

Q 158% Net retention. Expansion momentum and how it’s changed in the last 90 days.
A 158% was the exact NRR of SNOW when they first went public. Customers are using SNOW more efficiently, consumption is more methodical, but not seeing customers decrease their spend in any material way, just growing at a slower pace.

Q Verticalization. What are you seeing in terms of growing/slowing verticals?
A Financial Services is their biggest vertical, next is media, technology, entertainment. Newer technologies we’re seeing a slowdown. Seeing a slowdown in venture capital led companies.

Q Update on top GSIs and revenue expectations next year and correlations
A Top 15 GSI’s booked $1.6B last year. Re: Concrete relationship between their spend and SNOW’s revenue -He’s not going to guide on this.

Q FCF
A I don’t even look at billings, because
Relationship between OM and FCF, OM will expand at a much faster rate. Clearly just guided to 6%. Will update this at their investor day presentation.

Q Thinking back to the Q3 ramp, there were some large enterprises that you expected to ramp. Did they? Has it changed based on Q3 announcement?
A Converted 90% of current weighted pipeline. Normally it’s higher than that. Customers are just buying more on a quarterly basis. CEO doesn’t focus on booking. Revenue is their leading indicator. Customers are simply ramping at a slower pace to conserve as much as possible.

Q Insight on adoption.
A Definitely have unleashed a full court press. Any spark shop that uses SNOW is really theirs. Will challenge any Spark shops. Can see clearly from their own data who’s doing what, and they’re clearly using SNOW. Lot of POC activity. Super encouraging results. Their sales force is really excited about it.

Q Legacy migration from On Premise. Is macro changing any sense of urgency. Will new acquisition of Snowconvert improve this?
A Have been working with snowconvert for a long time. Not really seeing slowdowns on migrations. Customers are doing contract extensions. Customers don’t want to get too far over their skis. Migrations are happening fast and furious.

Q Revenue exposure in start-up tech/venture capital led companies?
A In some companies you can see slowdowns in Rifs. No correlation between this. CFOs are looking at ways to cut costs either in headcount or other ways.

Q 40% product growth guide, how to think re: seasonality and slower ramp times?
A More recent adoptors are ramping slower. Macro is a factor and it’s a factor that newer customers aren’t necessarily venture-backed.

Q Any slowdown in use cases?
A No reduction in use cases.

Q FCF reached 25%. Provide color re: balancing growth and how you think about bringing down
A FCF is not directly related to their growth. When productivity increases they’ll add heads. Where most companies are cutting, SNOW added 1,900 last year with 1,000 adds this year.

Q Unises product in developement
A Still early on. 10 or so customers are evaluating it. To early to have any meaningful adoption.

Q $2B share buyback vs. spending on R&D
A Have $5.1B and started with same amt. Have more than enough $ to do this. You can only add so many people so fast. Engineering isn’t asking for additional people. Can still hire great candidates as they find them.

Q 1,800 tio 1900 new customers per year -future outlook?
A Focuses on quality of customers, not number of customers. $1M customers has stayed flat. Revenue per $1M customer will likely grow per CFO.

Q 20% of customers have used SNOWPARK. When will more customers work out use cases?
A 2nd half of the year they think they’ll see material impact. Growing from a small base. Our guidance for this year is not material. Longer term it will be material.

Q Margin, drag on growth, guiding to 25% FCF. Are you re-thinking $10B
A Just going to have to wait until investor day to find out, but there’s definitely upside.

Q Booking slowdown at the end of the qtr. Lower close rate?
A Most of bookings were customers buying enough capacity to get them through. Biggest thing on revenue guide is they’re seeing large, global 2000 who are very methodical about how they adopt and spend money.

Q Behavior of new cohorts. How to think about it going forward?
A In a consumption model, at beginning of quarter, they start at zero. Customers are still growing per NRR.

Q R&D priorities vs. entering new markets
A Continue investing in analytics, coloration/clean room space and workload enablement. We continue to invest in all 3. Will have Fedramp and public sector will be growing. They anticipate being in China this year. Not opening any other new countries.

Q AWS. RE: Azure please comment. Margins/guidance higher -any color re: key levers enabling that?
A Margins: When SNOW slowed down hiring/managing their costs, do expect longer term margin there. New AWS agreement is a great step forward. Had $1.2B and now have $2.5B. Azure they’re in the middle of their contract. Will discuss better terms, not just pricing. Tracking to fully consume GCP and they’re moving forward w/ AWS and Azure. (obviously left out GOOG)

Q Budget related change mgt -trying to understand better.
A Not growing as quickly as they did in 2021 and 2022. People are being more cost conscious and that’s why you’re seeing crazy consumption spikes. People are using SNOW more efficiently. Partners are getting better at migrations and that’s part of slowing down their revenue growth.

Q Any change in how you’re thinking re: target levels at 158%.
A Not forecasting it to dip to that level. Clearly as the numbers become larger, it’s harder to grow. Will depend on the customers they’ve landed. In 2020, they actually had a net revenue retention rate that went up. That’s the beauty of a consumption model. Not seeing a precipitous slowdown.

Q ?
A On average, there are some customers who are ramping spend, and some slowing spend. Doing everything they can to ramp spend on SNOW.

Q Guidance construction. Total customer adds. Looking at global 2000, having 1-2 year ramp. Detail re: additions to global 2000. Company’s exposure to VC backed companies and how they’re ramping.
A Ramping to revenue…Have not seen any change in the deal size. Not guiding to revenue retention. Some large companies, large unicorns that are ready to go public are very well capitalized.

Q Hardware and software improvements that were a focus at the beginning of the year. How that played out and same for upcoming FY?
A As I said before, we factor in a 5% increase for hardware and software improvements. I feel pretty good about them. Didn’t get all the graviton upgrades done in 22, but did in January.

Q International -What drove underperformance.
A AMEA had a good consumption, but was slowest, Japan is very methodical/buy as you go. Other areas in Asia are slow, but SNOW doesn’t target Asia.

Snowflake (SNOW) Q4FY23 Press Release
Snowflake - Snowflake Reports Financial Results for the Fourth Quarter and Full-Year of Fiscal 2023

SNOW Q4 FY23 Investor presentation:
Snowflake Investor Presentation (q4cdn.com)

I hope this is helpful information before the transcript comes out later tonight.

sjo

[stryker82]

here are numbers:

		fq4 22	fq3 22	fq2 22	fq1 22	fq4 21	fq3 21	fq2 21	fq1 21
rev		589	557	497.25	422.37	383.77	334.44	272.2	228.91
QoQ		5.7%	12%	18%	10%	15%	23%	19%
guide	568	535	500	435	383	345	280	235	195
GuideQoQ	6.17%	7.00%	14.94%	13.58%	11.01%	23.21%	19.15%	20.51%
ytd rev		2,065.62	1,860.39	1,637.83	1,412.78	1,219.32
		46.21%	52.58%

QoQ has come down to 5.7% from 12% last Q. YoY ytd has come down to 46% from 52% last Q. guide QoQ has de-accelerated as well. next Q guide is lower then this Q rev. something I noticed with Bill and Datadog.

[bnh91]

Stryker,

The next Q guide is not lower than this past Q rev. SNOW guides for PRODUCT revenue only. You are mixing up total revenue from the past Q vs. product revenue guide. Q4 had $555m PR and guide for Q1 is $573m at the top end (+3.2% seq).

Bnh

[anthonyms]

Probably worth keeping in mind that the Q4 revenues were lapping a 101.5% YoY growth rate in last year’s Q4 and the coming Q1 and Q2 have to lap 84% and 82% YoY growth rates. After that the compares get easier so I could see the guide being raised upwards by mid year.

Ant

[jonwayne235]

Snowflake had a bad disappointing quarter. The short term business has taken a huge hit. The question is whether the long term business trajectory is also faltering?
Snowflake’s one or two liner summary of macro impact on their guidance was best given by CEO Slootman himself on CNBC. How much credibility do we give Slootman’s words below, after their guidance take-down? (I still hold it as my largest position for now)

Snowflake CEO on customer spending, weak guidance, A.I. and the company's outlook

CNBC: Do we need to be concerned about the macro impact on those businesses and how that might affect their rate of consumption?

SLOOTMAN: No, not yet, because the consumption is holding up. I mean, we obviously, you know, took our guidance down, but that was really a reflection of the newer cohorts. You know, having a very different ramp or incline in terms of consumption. And the reason that is happening is we’re seeing much more large mainstream enterprises coming into the business.
Just remember, Snowflake, the early adopters were all digital natives.
Very aggressive adopters, plus the economy was on fire at the time. You saw much more aggressive ramp in the early days.
Now we have mainstream enterprises coming into the cohort mix, and also at times when people are having economic, you know, reservations and caution. That’s really accounting for it.
I do think that the terminal value, if you will, of these large enterprises is going to be much better than the early cohorts. It’s pay me now or pay me later. I don’t view it as a negative at all. I think it will stabilize our business and make it far more predictable where it is all going to end up.

[Raylight]

Nice find. There’s a stark contrast between the comments here and the prior earnings call. From their Q3 call:

Analyst
[…] I’m just wondering with the macro uncertainty, if you’re seeing any customer behavior changes in terms of the type of data that they’re ingesting or even if they modify and reduce some of the data ingestion that maybe they were doing previously.

Frank Slootman
This is Frank. Not really seeing that. We have done a lot of traveling during the quarter inside and outside the country. And I think one of the sentiments that I’ve run into is that we’re sort of past – sort of the bleeding edge earlier adopter class or customers that we have acquired over the last, whatever, five, six, seven years. And we’re now into the people that didn’t sign up early on. And their overriding sentiment is a sense of FOMO or fear of missing out. And they’re looking at us like we can’t be left behind, help us catch up. And a lot of times, the challenges around that are based on their ability to harness the technology in terms of the skills and the expertise. So in other words, our mix of tools is going to evolve to really help customers address that gap because of anything they want to accelerate, they want to lean in, they want to move faster. They literally overriding sentiment is we’re afraid to be left behind. This is how important this is. And they are clearly identifying what they think is holding them up in terms of getting there.

So the FOMO cohort is now a FOMO & FUD cohort?

We’re still in Mathew Prince’s grandma’s tule fog, and my main takeaway from their call and guidance is that they have less visibility than I would have thought. Especially when considering that they’re all about data.

(Snowflake is my second largest holding, behind Cloudflare.)

(Edit: Have a bit of a cold right now and found myself unable to elaborate. In case it isn’t clear: maintaining an outsized position SNOW implies I’m quite bullish.)

[MAS4R]

@jonwayne235

I do think that the terminal value, if you will, of these large enterprises is going to be much better than the early cohorts. It’s pay me now or pay me later. I don’t view it as a negative at all. I think it will stabilize our business and make it far more predictable where it is all going to end up.

First of all, Jon, a note of appreciation for your posts on various topics over several months. I think you have contributed a great deal by offering differing, pointed perspectives on various subjects, which allows the less informed among us to become a tad better informed.

As for the quote, this makes perfect sense to me. The reason I only briefly held SNOW directly (I own a meaningful to me exposure indirectly) is that 1/ the market cap was–and even now remains–quite large and 2/ SNOW is extremely well known and generally highly regarded. In my inexperienced mind anyway, this leaves little room for significant out-performance, particularly on shorter time frames. This is why I love still having exposure on LTBH basis, but I don’t want any on indefinite basis. I feel it should perform better than say QQQ on a very long frame like a decade but I am not seeing why it should do so by very much because that would require that they not only maintain their position, but also find revenues that are not currently “baked in” by the market and/or accelerate their revenues more than the market currently expects.

“that they have less visibility than I would have thought.”

I think they have long been very upfront about it. I don’t recall which quarter it was, but it was one of those that were well received. They said specifically during that call that the usage out-performance had been driven by specific large projects by large customers, usage SNOW had not expected to that degree. The statement implied that the same could happen in reverse. Just as you can have somebody working on a very large project “overtime” so you can have somebody suddenly deciding they can push the completion of a large project out a quarter or two.

[LisaOnCloud9]

Thanks all for the great thread so far! Well, this was a tough quarter.

FWIW, here are my notes from SNOW’s quarter:

Insights into consumption, revenue + customer activity:

Snowflake is seeing slower-than-expected growth, as can be seen in their down-corrected full-year guidance. They pinpoint several reasons for the slow-down:

• Bookings reticence:** Customers only buy enough to get through the next short-term time-frame, while previously, they booked for many quarters and even years in advance —> multi-year bookings declined by 15% (which doesn’t dictate the actual spending patterns)

• Customers use SNOW more efficiently, meaning they do more with less

The worst-performing customer segments were:

• International markets: Accounts for 19% of the business. Esp. Asian market not going so great, Japan and other countries are quite cautious. The issues are emphasized by sales rep productivity issues in foreign markets. SNOW focuses on areas of Sales where they can ramp up Sales reps fast enough

• SMBs: More impacted than larger customers

• Startups and VC-backed companies who had a nearly unlimited budget before, now also need to tune down the money stream and become more prudent. This segment accounts for 10% of their business

• Newer customer cohorts, especially in the Global 2000, are ramping slower as they are more methodical and prudent in their spending than some of the early digital native adapters, who were, back then, basically flooded with VC money and didn’t really care about optimization

On the bright side:

• Customers are still consuming

• No material change in deal size

• No material change in use cases

• No material change in migration projects

Interesting: SNOW reported now the stable edges for their 1M customer cohort, where a large portion of them (65%) is having a lot of stable edges (6), compared to the other cohorts, where 23% of them have 1 stable edge. In terms of network effects, the larger customers are really more interesting in that sense

Customer growth: Focus on quality over quantity and expect revenue per customer to increase, especially in large customer cohorts. —> They expect revenue per customer to increase. However, without actual numbers this doesnät help - if they add 10 customers only, with better revenue per customer, it would not be helpful. However, this is quite exaggerated and I trust that they know where to focus on strategically and that it will increase revenue

Insights into Product strategy:

• Snowpark seeing great tractionMakes Spark jobs run cheaper, faster, and with better governance and simplicity. “This is really – the really biggest expansion, if you will, of our scope as a company since we first came out in 2015 time frame when we went after Hadoop workloads and things of that sort.” —> SNOW cautiously expect some material impact on revenue in 2nd half of this year.

• Strategic acquisition of Mobilize.Net’s SnowConvert. This conversion tool enables migration from legacy platforms. More concretely, it makes it easier and faster to migrate Spark workloads to Snowpark, so it will help SNOW make it easier to shove new and existing customers to Snowpark

• Streamlit is entering private preview status —> Streamlit enables the use of machine learning models and applications by a general business audience

• TelCo Data Cloud: SNOW is creating its 5th industry vertical Data Cloud which is focused on bringing telco-specific data sets, data practices, and applications into that ecosystem of telcos people that interact with each other. —> Some of their largest customers are in that segment.

My thoughts:
In typical Slootman style, CEO Slootman said he will “focus on the business at hand and the outcomes we can control. […] We are prioritizing positions that directly support the core mission of the enterprise. Resources will continue to be concentrated on the roles that sell, support, and build our products.

I noticed how, especially Mike Scarpelli, became more and more defensive with every analyst question, I would have hoped for a different approach to handling this agreeably tough situation. This is something I noticed quite on the negative side of things, but let’s start with the highlights (yes, there is some light at the end of this tunnel).

Highlights:

• 1M customer cohort holding up steady —> check
• Record profitability —> check (while everybody likes to see cashflow these days, it does not compensate for lower revenue growth as seen by the sharp market reaction)
• Stock repurchase program —> seems to be a common theme this quarter paired with record cash… However, given they DO invest in R&D, significant new headcount, as well as strategic acquisitions, I think that makes sense and surely is a nice to have against some of the SBC dilutions
• Snowpark seeing very positive traction and if they manage to grab all those Spark workloads, this can be quite an attractive outlook for the future
• I like how they continue to build out their industry verticals to really engage the large customers in that segment
• They significantly deepened their relationship with AWS and also work on their contracts and relationship with GCP and Azure… Regarding AWS partnership, they plan on:

1. • Joint GTM efforts
2. • Better pricing for SNOW (—> likely to materialize in better margins)
3. • Enhance product collaboration and industry verticals

Lowlights

• Revenue growth and guidance, specifically the down-corrected guidance
• Growth and consumption pressure from many sides at once
• Decreased net retention rate
• Overall slower customer growth, incl the lumpy G2k cohort
• Somehow uninspiring and defensive attitude in the Call

Final words
Well, it was not what I, or many others, for that matter, expected or hoped for. The usual confidence subsided for some more defensive attitude, which is understandable given the uncomfortable situation, but it could have been more inspiring for investors.

SNOW is seeing pressure from many sides at once, and on top of that, add a tough macro environment, so I think right now there is no way out, only through.

I don’t think that they will fundamentally go down forever now, I rather expect one of two scenarios to happen:

a) They will tick up again once macro subsides and become more of a Cloudflare-type-of durable, but overall slower grower (which would be fine, once the price has settled with the reasonable valuation. Note: NET has a similar valuation to Snowflake these days, even became a bit more “expensive”). Reasoning: They do have a very ROI-generating, product that is loved by customers, we should not forget that. But, it might be that more “methodical and prudent approaches” are here to stay for a while, and coupled with the law of large numbers, I find this scenario quite reasonable.

b) Once macro subsides and these several headwinds that are affecting SNOW right now fade, they could see similar strong recovery patterns (remember DDOG during COVID). Due to the nature of the fully consumption-based business, they could enjoy a significant upside, once all the piled up and held-back workloads flood their platform. If this will happen, and also, how durable this will be… no one knows. But I would not exclude this scenario, either.

This certainly was a puzzling quarter, so it is especially interesting to read your thoughts here and how you think about SNOW. It is still one of my core positions and I certainly do not yet feel like I need to sell, but I will have more realistic expectations now (they are not fully resilient after all, unlike our hopes) and carefully check how things will continue.

Investor’s day will also be interesting, maybe Scarpeli and Slootman will be in a more confident and chatty mood by then - hopefully inspired by some positive developments

Best
Lisa

[ChangHsieh]

The previous COVID was a V-shaped reversal, while this time it may be a U-shaped reversal, which is more similar to 2008.
From a psychological perspective, companies will become cautious after experiencing an economic slowdown, and their pace will not keep up when the economy begins to recover.
It is not that the companies have problems at present, but rather external factors are affecting them. This time, we need to be patient and not emerge from the trough as quickly as we did in 2016 and 2018.

[stocknovice]

@LisaOnCloud9, your deep dives are the real deal.

Please keep them coming.

[jonwayne235]

While the latest quarter from Snowflake was disappointing, it’s nice to be reminded every so often of the longer term ‘visibility’ of the terminal value from big customers using Snowflake.

An article on Forbes yesterday: Goldman Sachs Integrates Legend Platform With Snowflake And AWS

Perhaps only 20% of the total workloads from Goldman Sachs or JP Morgan are in AWS/Snowflake, which gives a long runway for growth.

Chris Degnan, Chief Revenue Officer at Snowflake:
The untapped market for enterprise cloud services is significant. I estimate that between 5% and 15% of workloads are currently in the cloud. At Mobile World Congress, people were talking about moving more network loads and data analytics to the cloud. There are enormous possibilities. For example, Goldman and JPMorgan are only 20% in the cloud.

There’s also the untapped, burgeoning opportunity with Snowflake native apps - which in this instance could be consumption done by Goldman’s external customers. Goldman, and other SNOW customers, are incentivized to monetize their own data with the use of Snowflake.

Neema Raphael, Chief Data Officer at Goldman Sachs:
Clients tell us ‘we love your data. We wish we had those capabilities.’ We will make the data available so clients can increase revenue and improve their customer experience. What we have now is the base layer. We will add vertical financial data clouds — such as a health care cloud. We will build an artificial intelligence/machine learning layer on top of the Legend Platform. We love Snowflake and how it is integrated into the Legend Platform.”

https://developer.gs.com/blog/posts/legend-plus-snowflake-native-apps

From Goldman Sachs’ managing director, April 2022:
Running our vendor data engineering team I have personally seen the time and energy required to set up teams with access to new datasets. It is a frustrating process - for both business users and engineers;
At a recent Snowflake event, I learned about Native Apps, a marketplace of new capabilities they built on top of secure data sharing. Following the event, my manager stopped by my desk to learn more about these features and brainstormed how Snowflake Native Apps could potentially solve a critical and long-standing issue for our users
This conversation quickly led to an “ah ha!” moment: if we can combine Legend with the Snowflake Native App capabilities, we can unlock the full performance of Snowflake while still providing logical separation of client, vendor, and Goldman Sachs data.