Let’s have a look how Snowflake did versus my prior expectations:
- Reported Fiscal Q1 2025 on 05/22/24.
- Product revenue expectation: $775M (5.0% QoQ, 31.3% YoY), assuming a 3.5% beat.
—> They delivered $790M (7.0% QoQ, 33.8% YoY). Wow! Just look how historical Q1 raw sequential adds compare to this: 1Q21: $19M → 1Q22: $36M → 1Q23: $35M → 1Q24: $35M → 1Q25: $52M!!! Also, this was the biggest guidance beat we have seen in 7 quarters, where they beat on average by 3.4% in the 6 quarters preceding this Q1. This Q1 the beat was 5.6% at the midpoint. (So much about low-balling the guide last quarter to set the new CEO up for success.)
- Q2 new product revenue guide: $806M (4% QoQ, 26% YoY) which I would interpret as $833M (7.5% QoQ, 30% YoY) and expecting re-accelerating QoQ growth.
—> Q2 guide was for 807.5M at the midpoint (2.3% QoQ, 26.1% YoY). What is going on here??? Only 2.3% QoQ growth after just delivering 7.0%??? Let’s put things into perspective: Historically, in terms of raw sequential adds, Q1 has been similar or down in comparison to Q4. Not so this Q1 where it was up from $40M in Q4 to $52M in Q1. (QoQ growth also accelerated to 7% in Q1 from 5.7% in Q4, while it was down in every of the last three years going from Q4 to Q1). How about typical Q2’s? Q2 has historically been equal or significantly stronger than Q1 both in terms of sequential raw adds and QoQ percentage growth. But their Q2 guide implies that QoQ growth will drop from 7% to 2.3% without a beat. Now of course they will beat this 2.3% guide, but by how much? I see two possible outcomes: First outcome would be that their Q1 revenue growth was a fluke and they will just beat with their standard historical beat of around 3.4%. In this case they will decelerate QoQ revenue growth in comparison to Q1, which would be the complete opposite of what we have seen in the last four years going from Q1 to Q2. I ask myself, after delivering such a strong quarter, why would they suddenly decelerate in Q2? And by that much? This leads me to the second possible outcome: They will again beat super strong, as they just did this Q1. For example a 5% beat would result in a further slight acceleration QoQ to 7.4%. If that happens I would expect them to strongly beat their FY guide, which, by the way, they just raised to $3.3b from $3.25b, a solid 1.5% increase. That would be really fantastic as it means FY25 would mark the first year where Snowflake would not continue its steady decline in YoY growth rates that started 10 quarters ago. And this Q1’s re-acceleration from 32.9% YoY growth to 33.8% YoY might be a first sign of that - maybe also a sign of the AI-wave starting to hit Snowflake?
- NRR around 129% would be fantastic and indicating bottom of this metric.
—> We got close here with 128%. This tells me this metric starts to settle finally, which is really great news, considering that it is an up to 2-year backward looking metric.
- I would like to see RPO greater or equal to $4.9b.
—> We got $4.99b, an acceleration in YoY growth from Q3: 23.2% → Q4: 41.4% → Q1: 46.3%. Awesome! Even better, cRPO YoY growth also continued to accelerate: Q3: 27.7% → Q4: 28.5% → Q1: 30.9%.
- I would like to see total customer growth around 4% QoQ and $1M+ customer growth around 4.5% QoQ.
—> All customers grew by 3.9% and $1M+ customers grew by an amazing 5.4% QoQ!
- I would like to get some commentary on market place listings and stable edge customer growth and how to reconcile this with new AI related business.
—> Both metrics were super strong this Q1: Market place listings grew 6.2% QoQ, up from 3.6% in Q4 and >1 stable edge customers grew 23% QoQ, up from 2.6% QoQ in Q4 adding a record new 590 customers to this cohort (up from 65 in Q4). I didn’t have time yet to listen to the whole earnings call, so not sure if they were talking about these metrics, but the general idea is that the strong performance we got this quarter will continue feeding their flywheel.
- I would like to see an operating income margin around 10%, a net margin around 15% and a free cash flow margin around 45%.
—> operating margin was 4%, net margin was 6% and fcf margin was 44%. The reason for the lower operating and net margins was a significant increase in R&D spend, which grew 57.5% YoY. The reason they gave for this and the down-revised operating income margin guide was “in light of increased GPU-related costs related to our AI initiatives. We are operating in a rapidly evolving market, and we view these investments as key to unlocking additional revenue opportunities in the future. As a reminder, we have GPU related costs in both cost of revenue and R&D.” Although I’d like their margin expansion to continue eventually, I think it makes sense for Snowflake to grab as much as they can from the AI opportunity that lays in front of them. We have just seen that the hyperscalers and other big players like Meta are doing just the same - by significantly increasing their spend on GPUs this year. So depending on how big we think the revenue opportunity in front of them is, we should be careful in valuing this relative drop in profitability. IMHO, given the coming AI wave and how early Snowflake is we should probably focus more on revenue growth than profitability margin expansion - at least for the next couple of quarters. For now, I trust management that they will find the right balance here.
Overall, I was pleasantly surprised with this earnings report - especially the revenue growth re-acceleration. Combining this with strong G2000 and large customer growth, NRR settling and cRPO re-acceleration continuing I think we have a great setup for future revenue growth. So just from this quick look at their results I’d say this was a really great quarter, both from a numbers and narrative point-of-view!
-Ben
