Part 1: Future Revenue
We are landing more Fortune 500 customers. We talked about we landed 19 in the quarter, but those 19 we landed, just to reiterate, we’ve recognized virtually no revenue on those customers. That’s all in the RPO that will be in the next 12 months.
This is different from SaaS companies. When CRWD or DDOG gets a new customer, even if the customer only signs up for a single module with CRWD or DDOG, revenue will be recognized in that same quarter. The customer will likely add modules later and spend more, but immediately, in the first quarter they’re a customer, they contribute at least some revenue. With SNOW, the company signs up and…I’ll let the CFO tell it:
especially if you’re doing a legacy migration, it can take customers six months-plus before we start to recognize any consumption revenue from those customers because they’re doing the data migration. And what we find is – so they consume very little in the first six months and then in the remaining six months, they’ve consumed their entire contract they have. And when we do a renewal, that’s when most customers are doing the multiyear renewals once they’ve proven the use case on Snowflake. And so I haven’t seen much difference other than we are, as you know, when Frank came here, he really started focusing more on enterprise customers.
With SaaS, each quarter 100% of revenue carries over into the next quarter. Sure, they are going to sell more, but they start at 100%. SNOW starts at well more than 100% each quarter, because customers who haven’t paid yet are already customers.
Part 2: Visibility
With this future revenue, it’s not “well, it’s coming, and we’ll see what it is when it gets here!” The RPO tells the story: Customers make plans with SNOW about what they want to spend, and they book it (and huge renewals come later). SNOW has such amazing visibility into what revenues will be in the future that when an analyst asked if AWS was going to continue to be their largest cloud provider the CFO said:
I think AWS will continue to be our largest cloud for quite some time, but we are definitely seeing a lot of large enterprise customers choosing to go with Microsoft. But as I mentioned, the revenue is lagging when we book a deal. So it’s going to be the second half of the year in fiscal 2023 I think you’re going to see Azure kick up as a percentage, but we still think AWS will remain our No. 1 cloud partner.
That’s a year and a half from now. They have enough visibility to know that the customers on Azure will be ramping up then – and ramping enough to move the needle on the AWS/Azure mix. Stunning. Also, the CFO said, So I do expect net retention rate this year to remain very high. It should be north of 160% throughout the year. The visibility is so insanely high that these guys know what their NRR will be!? Wow.
Part 3: Valuation and conclusions
I think the visibility into future revenue is the secret sauce SNOW has, that Buffett (and many of you – Muji, Smorg, etc) saw a long time before I did. Because SNOW can see what revenue will look like WAAAAAAAAAAAAY down the road, the market (never wanting to leave a sure thing on the table) is inclined to pay up for that hypergrowth now. And we’re talking triple digit revenue growth for many quarters to come, and even when it starts to slow down, I really don’t think it will fall off a cliff, because for one, as Saul has said, data grows forever – much more will be “consumed” a year from now, and more than that thereafter. But also, it seems to me that SNOW is enhancing what customers can do with data when they “consume” it with SNOW. Sure faster and easier to use…but also things like data marketplace, and then whatever they think of next.
So I can see why SNOW isn’t valued like a SaaS company, or any company that doesn’t enjoy its loaded spring dynamic. But that’s not to say SNOW is “back up the truck” cheap. In fact, it’s mostly to say: I don’t know how to value this company, or how to compare it to other companies. And as always I also don’t know how the market will digest everything with SNOW. So I’m proceeding cautiously: I took a 2.5% position yesterday. But whatever happens, this will be a fascinating company to follow, and I’m glad to have at least a small stake.