First some definitions and explanations
RPO - future contracted revenue.
current RPO (cRPO) - RPO that will be recognized over the next 12 months
Snowflakes slides tell us how to think about RPO. https://s26.q4cdn.com/463892824/files/doc_financials/2022/q2… RPO ONLY includes contracted future revenue. Snowflake is a consumption based business. This means companies sign a contract with snowflake for a minimum spend. They owe snowflake that money at minimum no matter their usage. If the business uses more than that minimum spend then they pay that to snowflake in arrears. So this is important. RPO only tells us the minimum amount of future contracted revenue. It tells us nothing about customer usage over the base contracted rate.
. For example a company can sign a 1 million dollar contract with snowflake over . Is it a 3 year contract…is it a 1 year contract? I’m going to over simplify here but this is just to make a point. If it is 3 years then 33 million would go to cRPO and 100 to the total RPO. If it is a one year contract than 100 million goes to cRPO and 100 million to RPO. Snowflake reports cRPO as a percentage of total RPO.
RPO gets a even a little more complicated because of the difference between cRPO and RPO
About a year ago snowflake started to incentivize its sales force for multi-year contracts. Per this thread that has been referenced a number of times, https://twitter.com/jaminball/status/1430706365643706370. This means that total RPO would go up dramatically since longer contracts are going to be much larger than shorter contracts. A company could sign up for 1 million dollars each year, or 3 million dollars over 3 years. In scenario A that means RPO goes up 1 million dollars. In scenario B it is 3x that at 3 million dollars. This is why we saw RPO growth be so incredibly high over the last year. Now we have lapped the push for multi-year contracts. RPO was artificially high over the last year due to the incentivization of multi year contracts.
We can correct for this multi-year ballooning of RPO by following the cRPO but unfortunately snowflake has only given us the ability to calculate cRPO over the last 3 quarters. Those numbers look like this.
What we really want to know is How much revenue in a quarter is from RPO and how much is from usage over contracted revenue . We aren’t going to be able to understand that until either snowflake gives us that number OR we have multiple quarters of cRPO to see how much is passing to revenue.
At this point we need to look at other numbers to see if the business is on track. DBNER is backward looking but so far that number looks great at 169%. Customer count is forward looking for revenue especially for Snowflake.
Here are sequential customer adds for the last 8 quarters.
2020 2021 2022 Q1 246 328 393 Q2 353 397 458 Q3 387 437 Q4 458 585
There is clear seasonality for customer adds and management has told us the big RPO quarters are q3 and q4 which is born out by the data above.
Customer adds are going to decrease as a percentage of revenue as snowflake continues to have more total customers. I want to see total customers added increasing over time. The above table shows that. Is that enough to sustain Snowflakes growth? I don’t know. Those customers could be bigger than early customers that were added. They might not be. I just don’t know.
We don’t know YET if the current RPO numbers are good or bad.
We DO know that not all revenue comes from RPO
We don’t know what % of revenue comes from RPO vs consumption over what is contracted.
We DO know customer numbers adds are increasing compared to equivalent quarters.
We don’t know if the customers add will be enough to keep SNOW close to 100% growth a year from now.
We DO know operational leverage is improving nicely
We DO know Snowflake guide with a typical beat is essentially 100% growth next quarter and 100% growth for the year.
Last quarter when SNOW was around 200 dollars I felt like it was a slam dunk investment. At the current price SNOW is equivalent to investing in SNOW last quarter around 255. I’m not adding I see a company that will continue to grow very quickly over the next 3-6 months. I’ll get more data in 3 months to see if that seems true going forward. I don’t think we know enough about RPO to use it as a data point to sell SNOW and I think SNOW’s customer adds aren’t as bad as others have said. As long as SNOW keeps guiding for strong revenue growth and the stock price doesn’t get too out of hand then I probably will stay invested.
All the best,