I just listened to the 3 results presentations of Snowflake in order to get a fresher understanding of the business going into results later today.
After Q1 2022 results I was worried about the apparent marginal slowdown of total customer growth and RPO. Saul at the time rightly pointed out the RPO was seasonal, but that still left the apparent customer growth slowdown.
I was trying to understand the direction of the growth of the business, and after listening to the calls again, I believe that I was focusing on the wrong metrics.
A theme going through all of the results presentations has been the verticalisation of the sales forces as well as a focus on larger customers over the last year and a half, both within the existing base and in targeting new customers.
The CFO said in Q3 that they have been adding a lot of effort to focus on their top 250 customers and the CEO stated a number of times how the focus on larger customers have been progressing well.
What that means, at least to me, is that the total number of customer wins would perhaps slow down, and that metrics tracking larger customer should accelerate.
And that’s exactly what happened.
The qoq growth rate of total customers over the last 5 Q’s, from Q1 2021 first to Q1 2022 last was (Q1 2021 and Q1 2022 bolded, for comparison purposes):
14% 15% 14% 16% 9%
And for customers spending >$1m the qoq growth rate for the same time series was:
17% 17% 16% 18% 35%
Looking at the first series made me come to the wrong conclusion: marginally slowing customer growth (9% this year vs 14% last year), while looking at the second is probably the correct way to look at it: successful execution of a focus on larger customers, and accelerating growth in large customer growth (35%!! this year vs 17% last year).
On that same theme, they onboarded 193 new S&M employees (1450-1257) in Q1 of 2022 which is more than they added in the whole of FY 2021 (calendar 2020): 175 (1257-1082). Getting new sales and marketing people productive takes time. And these new professionals will only really start meaningfully contributing this Q and next.
The second thing that I did not focus on enough was around international growth. In 2020 year, the CFO noted Japan specifically and that because the business was still still sub-scale there, the GM% of that geo was still negative. In the most recent conf call the growth numbers for both EMEA and APAC were fantastic. Slootman said in his Q1 prepared remarks “both EMEA and APJ have breakout bookings quarters. EMEA grew more than 200% and Asia Pacific grew more than 300% year-over-year.” - pointing to further acceleration and potential gross margin improvement.
So rather than marginally slowing growth a picture of accelerating international and large customer growth emerges.
There are three key analyst Q&A’s that brought this home for me from the Q1 2022 Q&A:
The 27 customers getting to that $1 million-plus level this quarter, that’s a real eye-popping number. I think that’s more than you did in the first three quarters all of last year. Anything in particular getting that motion going faster? And on the other side of the equation, is that a number we could expect to see on a go-forward basis? Or is that kind of too high of an expectation to have for the remainder of the year?
Well, I’m not going to guide to $1 million customers. All I will say is there’s a number of – as there was going into this quarter, we had a number of customers on the cusp of going to $1 million, and we continue to see a number, and I think it’s going to be very strong growth. But what I want to remind people is, when we land a customer, it takes many times, six to nine months, I think it’s closer to nine months before a customer actually starts to consume at their contract rate. And so a lot of this is the impact of really focusing on larger customers over the last year-and-a-half that we’re starting to see that pay off.
But what I will say is, of that 104 customers, only, I think, about 25% of those are actually majors and then the balance is enterprise customers. So think about Fortune 500, only about 25% are Fortune 500. The others are across-the-board end customers. And my point there is even small companies can be big consumers of Snowflake. And there’s a lot of them, as I said, that are just on that cusp. So we expect that to continue.
Frank, I’d love to hear about what’s causing the breakout and growth in international regions? I know you guys had some leadership changes. I’m sure you’re feeding more headcount there. So how much is kind of your own efforts versus other factors like market awareness or growing cloud acceptance or anything else you’d call out?
No, it’s exactly what you just said. I mean we just needed to properly operationalize ourselves in these geographies. As you know, it’s market by market. We have to have the correct leadership in place. We have made a lot of leadership changes in these regions that we’re very pleased with. When you have a great product like Snowflake, I mean, the impact of that is going to come fast and furiously. So I’m personally going to invest a bunch of time in Europe, given my own background, because I think the opportunity is tremendous. So we’re excited that we actually see these regions coming online and contributing and we expect that to continue. We’re very happy with the latest changes we made in Asia Pacific as well. We have very high expectations of Japan, obviously, ANZ and there’s other markets where we’re going to be starting to open up as well.
I mean numbers look great across the board. The one outlier was the Fortune 500, which looked like kind of a slower net add in Q1. Anything you could kind of speak to this number, maybe seasonality or thoughts around what to expect going forward.
Well, these large accounts are very, very long sales cycles, and you are going to see lumpiness in the additions. Obviously, Q4 was a strong quarter. And as one would expect, that’s just landing a customer. That doesn’t mean it contributed to revenue. As I said, most of those Fortune 500, we landed in Q4. We’ve seen virtually no revenue from them yet today. I can’t stress that enough. And given Q4 is the end of a commission year for people and accelerators, reps do everything natural to close everything in the end of that commission year. So I fully expect we’ll continue to close Fortune 500 the balance of the year. And it’s all based upon when the customer is ready to begin that journey.
For me that paints a very positive picture, which I thought may be useful to the board. I’ll be looking through this lens at the results later today: continued success with larger customer growth, and continued success internationally.
Hope that’s helpful.