SNOW reports Q4

SNOWFLAKE REPORTS FINANCIAL RESULTS FOR THE FOURTH QUARTER AND FULL YEAR OF FISCAL 2022

-Product revenue of $359.6 million in the fourth quarter, representing 102% year-over-year growth
-Remaining performance obligations of $2.6 billion, representing 99% year-over-year growth
-5,944 total customers
-Net revenue retention rate of 178%
-184 customers with trailing 12-month product revenue greater than $1 million

  • And most conspicuously 67% Product Revenue guide for next year. Extreme sandbagging or slowdown? Either way, market has let us know what it thinks
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It is a high level of dilution although less than Palantir and frankly less than I had anticipated. At 100% growth rates it would be hard to get away with average levels of dilution I guess. Still Slootman would be aware of this and more than anyone has the ability to manage this.
Ant

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This isn’t “new” dilution. The fully diluted share count has been ~350mil shares for quite awhile.

When companies are reporting negative earnings they don’t show the fully diluted share count because it “dilutes” the losses. When it flips to reporting positive earnings as SNOW has recently they will start showing the fully diluted share count (~350m shares).

The share count will not have a big jump like this again save for some large acquisition.

Bnh

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This isn’t “new” dilution. The fully diluted share count has been ~350mil shares for quite awhile. When companies are reporting negative earnings they don’t show the fully diluted share count because it “dilutes” the losses. When it flips to reporting positive earnings as SNOW has recently they will start showing the fully diluted share count (~350m shares). The share count will not have a big jump like this again save for some large acquisition.

The above explanation by bnh is important to grasp. It seems to be an accepted conservative accounting rule that when you have an adjusted net loss your EPS is based on basic shares, so you won’t be using more shares to dilute the loss per share, but when you turn positive you switch to diluted, or maximum number of current shares, so your adjusted net profit is divided up into more pieces, and your Earnings per Share is made smaller.

Best,

Saul

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Saul,

the earnings release also addresses this in note (2) of the Financial Outlook section:

“(2) We may have a non-GAAP net income for full-year fiscal 2023. As a result, we are presenting the weighted-average shares used in computing net income per share attributable to common stockholders - diluted in the non-GAAP column of the table above, giving effect to all dilutive securities (stock options, restricted stock units, and employee stock purchase rights under our 2020 Employee Stock Purchase Plan). These dilutive securities would be excluded from the weighted-average shares used in computing net loss per share attributable to common stockholders - diluted if we are in a non-GAAP net loss position.”

JDR

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And not that it is is needed, but even the meager (<3%) dilution forecasted for FY23 is in large part due to the Streamlit acquisition, which will likely close in FY23 and will be 80% financed by new equity. On an $800M sticker price, depending on the closing date, this would be around ~3M new shares, which is certainly baked into that 360M fully diluted share forecast.

They also said on the call, “This will help us further manage dilution, which has already been running below 1% year on year on a fully diluted basis.” Any insinuation that SNOW is dilutive is so misleading that it would more be accurately characterized as a lie.

After listening to the call, the most standout elements to me were:

Good

  1. 24% sequential increase (184 from 148) in large customers(>$1M TTM contract value). And this, “based upon the ones that are just on the cusp of $1 million, that number will continue to increase.”

  2. Adj. FCF margin of 27%. SNOW’s rule of 40 is 129. And CFO said to expect “outsized” FCF in Q1. If 27% is what we got, then what dafuq is “outsized”?! Disgusting.

  3. Product (which is 93% of revs) GM at 75%, up YoY from 70%.

  4. 18 months of RPO on the books. They’ll never miss on top line.

  5. Best for last. 106% increase in bookings, for $1.2 Billion in new bookings in the quarter. In one quarter they booked new contracts equal to the entire TTM of revenue!

Good/Bad

  1. The insane 178% NRR but the guidance that this will fall to 150%-170% for FY23 due to data compression efficiencies (10-20% depending on customer, said the CFO). However, my read from the call is that the drop in NRR to 150-170% is a valley rather than a trend, as the data compression efficiencies take hold. In fact, they said as much. As this change is expecting to bring in ~$60m in new data loads while realizing ~$160m in customer efficiencies—for a net rev loss of $97m.

This is the best possible reason to have a revenue slowdown—-they’re making customer’s lives better/cheaper, and pulling in vastly more business. When this goes apples/apples in FY24, the compression will be reflected and I expect NRR will reverse higher.

Valuation

At one point after hours SNOW touched a 23x forward EV/S. The guide for 67% product growth for the coming year will probably come in around 80% or higher. In fact, they said that the amount of current RPO they expect to recognize as revenue over the next 12 months will rise 85% from last year, so I think 80-85% top line this FY is essentially the base case.

You know what happens when a share price gets cut in half whilst the revenue doubles? The P/S drops by 75%. You know what happens when FCF is egregious and there’s $5B on the balance sheet? The EV/S gets cuts by 80%!

That’s exactly what we have in SNOW.

In a year’s time it’s conceivable SNOW is sitting on an EV/FCF of 35x with a net retention rate still well above 150% (nevermind total rev growth, which’ll be much higher).

This one seems like slow pitch softball. Yeah going from 100% to 80% growth in one year sounds like CrowdStrike 2.0, but the retention rate is so damn high, with a clear explanation on the rev growth slowdown, I suspect growth durability in FY24 and beyond will be tremendous.

Eric Przybylski, CPA

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Great post, Eric.
There’s been nearly 40 posts/replies on SNOW in the past several hours, so apologies if my own reply here clutters up the board.

SNOW’s Q4 result was a big, unexpected miss. There is no way around it. You can’t sugar coat that or hand wave it away. Previously, they always beat their guide by 6%+, this time was a 2.74% beat.
My first thought was “this quarter was a failure” when I saw the newswire flash on the screen. I saw the Q4 product revenue print and the full year FY23 guide of 67% growth, did not feel the need to read the rest of the press release, and I shot first/asked questions later. I immediately purged all shares of SNOW from all my accounts. My initial suspicion was this Q4 miss probably meant their entire business was decelerating way too fast and the durable hypergrowth story is no longer intact.

But, after reading through the results in its entirety and listening to the conference call an hour later, I changed my mind and re-entered.

Revenue growth slowed dramatically, yes.
But the hypergrowth DURABILITY story is still very much intact.
The miss does not seem to be from competitive pressure or product mis-step, but rather unexpectedly improved (“intended”) efficiency in their product combined with what management claims is a one-time unexpected slow resumption from seasonal holiday activity in January.

We should keep in mind these efficiency improvements are not for “philanthropy” reasons as Slootman said, it’s not for charity. I think it’s best to look past that management believes NRR to fall from 170% range in the near term, but instead focus on NRR that should stay above 150% for an even longer term.
The increase in efficiency is deliberate (although near term impact was unexpectedly powerful this Q and next Q). This isn’t a drop in consumption because of competitive pressures (as said on call) or customer churn. This is all part of their plan to stimulate increasing demand over time for more workloads to cross into SNOW at a faster pace. It’s a plan they have had since the beginning, they’ve been improving efficiency all this time - but it’s one quarter where there was an outsized near term efficiency improvement. This is very different than UPST with unexpected fraud attack in Q3. This is very different than DDOG with its COVID impact in 2020. This is a near term hit that is supposed to boost growth over time (either by increasing magnitude of growth in the future or maintaining its durability even longer).

As said on the call:
As a reminder, we have landed hundreds of customers to do these big on-prem Teradata migrations. I think we’ve only completed. We’re completely shut down a little over 30 of those is maybe in the mid-30s now. There’s piles of other workloads that they plan on moving. And when customers see the price performance, they will accelerate the movement of those other workloads to us…there is a lag and that depends on the customer. It could be a 1-month lag, it could be a 6-month lag before they realize that and move more workloads.

And as others have posted already, they have stated they see a gross impact of about $162 million for the year, but $65.5 million in revenue will probably be made up by increased workload migration. Presumably, in FY23 this efficiency improvement investment will have more than recouped the net expected impact loss in revenue (or, in my opinion, it’s more likely that Slootman et al are sandbagging this and they will beat handily in FY23).

Honest question here. What other companies currently doing >90% revenue growth today, do we expect to grow 50%+ in 5 years time? Off the top of my head, for example, MNDY is growing >90% (organically). (I sold my MNDY position after their earnings last month.)
In 5 years, I’m not confident that MNDY will be growing 50%+.
MNDY is already slowing down to (probably) 70%-range growth for 2022, down from 91% in 2021, while at 382M run-rate (308M TTM).
MNDY is in a fiercely competitive landscape with greenfield grass that is going to dry up, and offering a non-mission critical product without a consumption based business model. I hope they’ll do well moving forward but I’m skeptical of their hypergrowth durability.

SNOW on the other hand, did more total revenue this reported quarter than MNDY did in the last four quarters combined, and at a faster YoY growth rate of 101%! The numbers are saying something about the past and current narrative.
SNOW’s narrative looks like it is still (despite its impressive run-rate already) on the very early innings of a prolonged hypergrowth trajectory, fueled by the continued secular cloud tailwind, data explosion and its superior product over any current competitor.
I think SNOW can do 80% growth this FY23, at least, with over $2 billion in total revenue, while producing a great FCF margin. I wouldn’t be surprised if they are growing 50% in 5 years from now, at perhaps $13B run rate.
In my mind, SNOW is mimicking a path like that of the existing hyperscalers. AWS just grew 40% YoY at $70B run rate. This is the kind of growth durability that the market prizes heavily over time (and often, ahead of time).

I have SNOW at 360M shares (they have been diluting shares by only 1% year on year, completely contrary to the mis-information that someone posted earlier today) and am conservatively estimating forward P/S at 33 (at 80% growth this year) as of today’s after-hours close price. Obviously, the future is always very murky, but I think its valuation at that price is the same as DDOG on a one and two year forward basis.

We’ll have to see if what management said about today’s result miss as being true or not (the seasonal resumption slowing being one time hit, in particular). I’m choosing to believe them, of course. But I’m glad I managed to re-enter with a cheaper cost basis today.

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Jonwayne235,

I agree with most of your comments - the only thing that makes me scratch my head is your actions, which are mirrored by a lot of others on the board lately:

A tendency to sell immediately on bad headline news and not even wait for the earnings call that provides the necessary background, only to later maybe re-enter.

Snowflake (like Monday, or Zscaler) is one of the highest conviction stocks for a lot of us, as has been stated in countless posts. How is it that this highest conviction can disappear in split-seconds, without even giving that highest-conviction company the chance to explain the results before shooting it down? All the good reasons why we are invested in the first place are suddenly worth nothing, just because revenues a few millions short (and we don’t even know why yet).

That just doesn’t go together for me. My conviction about SNOW (like UPST,MDAY,ZS) is strong enough that I’m willing to hear what management has to say before pressing the SELL button.

I’m all for ruthlessly getting out of a stock if the story has changed, but getting out before I even understand what the story is seems disingenuous to me. Please don’t take this as personal criticism - you’re one of the most respected and valuable members of the board as far as I’m concerned. But I feel it’s time to take a step back for all of us and reflect on the increasing trend for very rash decisions, market-timing (culminating in ‘sell before earnings, maybe get back in later’) and generally speaking an obsession with the market’s knee-jerk reactions as opposed to the actual company performance.

I know the past 6 months have been stressful - they certainly have been for me. I find the earnings expectations posts from dawsdaws incredibly helpful to prep me for them. But let’s cut our companies a little bit slack, and refocus on understanding the business and the mid/long-term prospects. Otherwise we’re all going to morph into daytraders.

In that same vein, it feels to me that there is a second, worrying trend creeping in: the expectation that our companies execute in absolute perfection, with surprises only ever to the upside. The reality for every company, as everyone who has ever worked for a company knows, is that business doesn’t happen in a straight line. It never does. That goes for closing sales like adding customers like take-up rates. These companies are growing at breath-taking speeds, yet on top of that enormous growth we’re expecting them to know one quarter ahead EXACTLY by how much they’ll grow next quarter, so they can build the appropriate ‘beat’ into their guidance, and they should grow quarter after quarter by the exact same (or improving) QoQ sequential growth rate. That is asking the impossible, and will invariably lead to a sell-out every other quarter or so.

193 Likes

Question!!!

“Bulk of my shares were out at $242.50, and I bought most back at $197.78 during the earnings call.”

How do you handle the “wash sale” on that kind of a transactiion?

Gayle

1 Like

jonwayne235,

thanks for providing so specific insight into your rationale! It’s certainly a lot more elaborate than I had made it sound.

I agree, given recent market behavior it can absolutely make sense to sell immediately first, with the expectation to be able to get back in at a lower price point once the share price has dropped. But my impression from following the board has been that wild swings in the investors’ level of conviction have been a lot more prevalent than cold-blooded utilization of price swings.

That’s an entirely different story. It’s a rational approach (certainly more than falling out of love, and then falling back in love 15 minutes later). Personally I would consider it too stressful, requiring very good timing AND a very high confidence in one’s ability to predict the market’s behavior. But as you rightly point out, everyone should do what works for them.

Thanks again for explaining your decisions.

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That’s an entirely different story. It’s a rational approach (certainly more than falling out of love, and then falling back in love 15 minutes later). Personally I would consider it too stressful, requiring very good timing AND a very high confidence in one’s ability to predict the market’s behavior. But as you rightly point out, everyone should do what works for them.

Agreed. And thanks to you and Jon for keeping the conversation civil. Most who read Jon’s very thorough breakdown of his thoughts on his after hours trades will realize they are not that nimble: a good reminder to know the game you’re playing!!! Don’t ever copy anyone.

However, let’s stop here. This is portfolio management. Let’s get back to discussing companies.

Bear
Assistant board manager

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Luciuse’s post # 83520 seems brilliant to me and expresses exactly what I have been thinking. Our board is for finding the best companies in the best fields, with the greatest tailwinds and the longest runways! They are high, high, confidence positions. We mean to hold them until there is a major change in the story.

To sell out of your position within a minute after results came out because their revenue was"only" up 101% ??? (instead of up 104% as you hoped for), and because of “guidance,” of all things, not on the basis that there is anything wrong with the company, or the revenue number, not that anything has happened to shake your confidence, but because you are betting that the market, the crazy market, will sell off because of it… that is just straight out gambling! It’s not investing! It is beyond silly! It’s ridiculous!

It doesn’t matter to you that there were a dozen other metrics showing that they are still hitting it out of the ballpark!!! NRR at 178%!!! RPO up 99%, and more than seven times this quarter’s revenue!!! Million dollar customers up 24% from 148 to 184, sequentially!!! Etc, etc, etc.

That’s gambling and day trading, not investing. And day traders eventually go broke. Almost all of them.

And here’s a quote from Luciuse’s post. Please go back and read all of his post:

a second, worrying trend creeping in: the expectation that our companies execute in absolute perfection, with surprises only ever to the upside. The reality for every company, as everyone who has ever worked for a company knows, is that business doesn’t happen in a straight line. It never does… These companies are growing at breath-taking speeds, yet on top of that enormous growth we’re expecting them to know one quarter ahead EXACTLY by how much they’ll grow next quarter, so they can build the appropriate ‘beat’ into their guidance, and they should grow quarter after quarter by the exact same (or improving) QoQ sequential growth rate. That is asking the impossible, and will invariably lead to a sell-out every other quarter or so.

Best,

Saul

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Sorry Saul and Bear, just want to add one thing.

The problem with someone coming on the board and posting a move like John Wayne did, that it turned out to be a success, it’s not the right message and not what someone that especially has the ear of so m ay people on here should even be sharing.

Did anyone need to know that this person actually sold and bought the shares back within minutes? How did this information help the board? As Saul points out, anyone that attempts to play that game will eventually get burned, so I’m not sure what motivates someone to share that.

So just for thought. If the AH price at the release of earnings last night tanked to 185, the same person sold there, then reassessed that move and had to buy those shares back at 225, would the sell and buy in that scenario have been shared on the board? I hope so, because it would have been a much better lesson of what not to do IMO.

I guess the lesson might be this. Post responsibly. Especially on a board the size of this one.

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