Snowflake Inc. (NYSE:SNOW) Q4 2023 Earnings Call Transcript

Snowflake Inc. (NYSE:SNOW) Q4 2023 Earnings Call Transcript March 1, 2023

Operator: Hello, and welcome to the Q4 FY ’23 Snowflake Earnings Conference. My name is Elliot, and I will be coordinating your call today. I would now like to hand over to Jimmy Sexton, Head of Investor Relations. The floor is yours. Please go ahead.

Jimmy Sexton: Good afternoon and thank you for joining us on Snowflake’s Q4 fiscal 2023 Earnings Call. With me in Bozeman, Montana are Frank Slootman, our Chairman and Chief Executive Officer; Mike Scarpelli, our Chief Financial Officer; and Christian Kleinerman, our Senior Vice President of Product, who will join us for the Q&A session. During today’s call, we will review our financial guidance for the fourth quarter and full year fiscal 2024 and our results of the first quarter and full year fiscal 2023. During today’s call, we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, products and features, long-term growth, our stock repurchase program and overall future prospects.

These statements are subject to risks and uncertainties, which could cause them to differ materially from actual results. Information concerning those risks is available in our earnings press release distributed after market close today in our SEC filings, including our most recently filed Form 10-Q and the Form 10-K for the fiscal year ended January 31, 2023, that we will file with the SEC. We caution you to not place undue reliance on forward-looking statements and undertake no duty or obligation to update any forward-looking statements as a result of new information, future events or changes in our expectations. We’d also like to point out that on today’s call, we will report both GAAP and non-GAAP results. We use these non-GAAP financial measures internally for financial and operational decision-making purposes and as a means to evaluate period-to-period comparisons.

Non-GAAP financial measures are presented in addition to and not as a substitute for financial measures calculated in accordance with GAAP. To see the reconciliations of these non-GAAP financial measures, please refer to our earnings press release distributed earlier today in our investor presentation, which are posted at investors.snowflake.com. A replay of today’s call will also be posted on the website. With that, I would now like to turn the call over to Frank.

Frank Slootman: Thanks Jimmy. Good afternoon, everybody on the call. Q4 product revenue grew 54% year-on-year and for the fiscal year grew 70%, totaling $1.9 billion. Q4 net revenue retention was 158%. We continue to be on track for our $10 billion product revenue goal in fiscal ’29. Remaining performance obligations grew 38% totaling $3.7 billion. We saw a measure of bookings renaissance with certain customer segments in Q4 reflecting a lack of visibility in the business and preferring a cautious short-term stance versus larger, longer term contract expansions. The contractual poster focused on sufficiently enabling consumption growth in the near term. This was more pronounced among international SMB and commercial customers and much less so at the high end of our customer base.

We made substantial progress on our efficiency metrics. Non-GAAP operating margin for the quarter reached 6%. Non-GAAP adjusted free cash flow margin for the quarter was 37%. For the full fiscal year ’23, non-GAAP adjusted free cash flow margin was 25%, totaling $120 million. But our data networking growth as measured by so-called stable edges grew 93% year-over-year. 23% of our customers now have at least one stable edge, up from 18% a year ago. Among $1 million consumption customers, 65% of them at, on average, six stable edges. Snowflake marketplace listings grew 8% quarter-over-quarter and now total over 1,500. During Q4, Snowpark for Python reached general availability status. Early traction is promising. 20% of customers have now tried Snowpark.

Photo by Markus Spiske on Unsplash

Snowpark is initially focused on the adoption and migration of Spark workloads for data engineering and machine learning. Spark jobs typically are on cheaper and faster on Snowpark with the added benefits of superior governance and operational simplicity. POC activity is ramping fast and benchmark results so far indicate superior comparative results. The Fortune 500 customer loads 1 billion transaction records into Snowflake every day. This organization take $1 million after migrating work from Spark to Snowpark. The financial services customer is migrating workloads from Spark to Snowflake and Snowpark rent 8x faster at 30% of the cost. We entered private preview standards with what we call Streamlit and Snowflake. This is the replatforming of Streamlit inside of Snowflake.

Streamlit is a popular application development framework for the Python developer community, especially those focused on machine learning applications. Streamlit enables the use of machine learning models and applications by a general business audience. In Q4, we announced our intent to acquire Mobileye net SnowConvert. SnowConvert’s proprietary conversion tools enable migration from legacy platforms. SnowConvert also helps migrate Spark workloads to Snowpark, capabilities accelerate migration to Snowflake and the strategic nature of this acquisition. We are operating in a vast and growing market, generating free cash flow and maintaining a strong balance sheet. We focus on the business’ hand and the outcomes we can control. We are prioritizing positions that directly support the core mission of the enterprise.

Resources will continue to be concentrated on the roles that sell, support and build our products. With that, I’ll turn the call over to Mike.

Mike Scarpelli: Thank you, Frank. Q4 product revenues were $555 million, representing 54% year-over-year growth and remaining performance obligations grew 38% year-over-year, totaling $3.7 billion. Of the $3.7 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months. This represents a 48% increase compared to our estimate as of the same quarter last year. Our net revenue retention rate of 158% includes 13 new customers with $1 million in trailing 12-month product revenue and reflects durable growth among our largest customers. The outperformance in Q4 was driven by longest tenured customers. We continue to see the greatest contribution from the financial services and media and entertainment verticals.

We continue to focus on growth and efficiency. We generated $215 million in non-GAAP adjusted free cash flow outperforming our Q4 target. Full year fiscal 2023 non-GAAP adjusted free cash flow margin was 25%. Q4 bookings underperformed versus our expectations, pipeline conversion in the final two weeks of the quarter diverged from historical norms. International territories drove the largest underperformance relative to plan and multiyear bookings declined 15% year-on-year. While we are not okay with this outcome, customers’ bookings behavior does not dictate their consumption patterns. Customers have the contractual right to sign smaller deals to bridge them to their contract end date. We are confident that our customers are committed to Snowflake and are increasingly focused on better managing their business during more uncertain times.

Q4 represented another quarter of continued progress on profitability. Our non-GAAP product gross margin was 75% scale in our public cloud data centers continue growth in large customers’ accounts in more favorable pricing with our cloud service providers will contribute to year-over-year gross margins improvements. Non-GAAP operating margin was 6%, benefiting from revenue outperformance and savings on T&E and lower bad debt expense. Our non-GAAP adjusted free cash flow margin was 37%, positively impacted by strong collections. We received some large customer payments in January that were expected in February. We ended the quarter in a strong cash position with $5.1 billion in cash, cash equivalents and short-term and long-term investments with no debt.

As noted in the press release that went out earlier today, we have expanded our partnership with AWS over the next five years more than doubling our previous spend commitments to $2.5 billion. As part of the new AWS — as part of the new agreement, AWS is committing to support joint go-to-market efforts, more favorable pricing. This partnership is aimed at driving growth in innovation. Now let’s turn to our guidance. As of today, we have completed the Graviton2 migration in all of our active commercial AWS deployments. We remain committed to driving towards greater profitability. We are focused on growing revenue while expanding operating and free cash flow margins. The change in existing customer purchasing behavior, lower-than-expected new logo bookings and slower expected ramp from our youngest cohorts has led us to reevaluate our FY ’24 outlook.

For the first quarter, we expect product revenues between $568 million and $573 million, representing year-over-year growth between 44% and 45%. Turning to margins. We expect on a non-GAAP basis, 0% operating margin, and we expect 361 million diluted weighted average shares outstanding. For the full year fiscal 2024, we expect product revenues of approximately $2.7 billion representing year-over-year growth of approximately 40%. Turning to profitability for the full year fiscal 2024, we expect on a non-GAAP basis, approximately 76% product gross margin, 6% operating margin and 25% adjusted free cash flow margin, and we expect 363 million diluted weighted average shares outstanding. I would also like to announce that our Board of Directors has authorized a stock repurchase program of up to $2 billion over the next two years.

This program reflects our conviction in the business and allows us to use our expected free cash flow to manage dilution over this period. Our share count guidance does not include the impact from the stock repurchase. During fiscal 2023, we added approximately 1,900 net new employees. We view the current hiring market as favorable for Snowflake and we’ll continue to prioritize hiring in product, engineering and sales. We expect to add more than 1,000 employees in fiscal 2024. We remain on track to achieve our fiscal 2029, $10 billion product revenue target. We look forward to executing against our growing opportunity. And lastly, we will host our Investor Day on June 27 in Las Vegas in conjunction with Snowflake Summit, our annual users’ conference.

If you’re interested in attending, please e-mail ir@snowflake.com. With that, operator, you can now open up the line for questions.

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Q&A Session

Operator: Our first question today comes from Mark Murphy from JPMorgan. Your line is open.

Mark Ronald: Mike, I’m curious if you have any insights into the consumption patterns that you saw generally, but including during the holiday periods, including MLK weekend and President’s Day week. Is there anything — any noteworthy change there? And then I have a quick follow-up.

Mike Scarpelli: There was nothing really noteworthy around the holidays. As we said, going into our Q4 guidance, we are factoring in the holidays. And clearly, we were 3% above our guidance, our actual results. And I will say President’s Day was slow, but February is off to a very good start. It’s kind of where we were expecting it to be.

Mark Ronald: Okay. As a follow-up, Frank, I wanted to ask you on the topic of generative AI and large language models. Can you frame up the opportunity there for Snowflake because I would think with the Unistore, you could probably handle all these chat logs. You could be training some of these models on very large data sets. I would think that Snowpipe’s can pull in social media feeds and kind of help to improve those models. You see any customer activity around that vector or any tailwinds you think that could be developing in time?

Frank Slootman: Well, it’s still early in the cycle. Obviously, like everybody else, we’re all over it in terms of evaluating where these technologies can make a difference. I mean the things that we sort of hone in on short term, is called completion code optimizations, things that are very, very clear business returns. One of the challenges with these new technologies that people come up with a lot of interesting questions, but without a solid business model that’s not going to take off. So we take a very pragmatic view. We do anticipate that Snowflake data will be a very, very big driver of large language model in conjunction with many, many other data sources. So we think that the gravity around data will drive a lot of this action activity to our platform.

Operator: We now turn to Kirk Materne from Evercore ISI. Your line is open.

Kirk Materne: Congrats on the quarter. Mike, can you just talk about the international sort of underperformance, actually a really good quarter. Is there something just specific about the region in terms of how people are consuming over there versus the U.S.? Or is this just a maturation of your sales organization that needs to continue over in that region?

Mike Scarpelli: I think it’s customers being a little more cautious in their business and just buying as they consume, which they can do under their contracts as well, too. We’ve always seen that in Japan, in particular. Customers tend to do that. But I would say part is also our own execution as well, too, which we’re working on. So, yes, I will say, we did see as well in North America, a number of customers, some of our larger customers who had consumed their full contract amount but still had a contract in place and just bridge themselves rather than do big deals right now. And I think that’s just a function of uncertainty in their business, but their consumption still continues to grow on stuff like it.

Kirk Materne: And just one quick one for Frank. Frank, on the telecom cloud that you guys have announced, I was just kind of curious your thoughts there, how fast do you think that could ramp? Obviously, financial services and some of the other verticals that you focused on been really strong to your point around some of the shared edges that you’ve seen in your bigger customers? Just any thoughts on how that could ramp for you guys?