The stock initially sold off about (13%) on lower product revenue, which went from 67% reported in Q3 to a guide in Q4 of 49% to 50%. This implies total revenue will follow as the two are closely related with product revenue making up 94% of total revenue. Technically, the product revenue guide implies a miss for Q4 as estimates were for 52.78% growth.
On the call, the stock regained some ground to finish at (6%) AH once management stated the full year 2024 product revenue would be 47%. Technically, this is also a miss as analysts had the number at 51% growth.
I'm not confident SNOW can resist further decel throughout FY2024; that's a bold guide with little to back it up.
It requires a lot of faith in management because they are essentially saying even though Q3 to Q4 dropped by 17% on product revenue growth (67% to 50%), they will only see a 3% drop for the following four quarters or an average decel of less than 1%.
It's also odd to get a FY guide right now as I looked at Q3 2022 call and it was not provided at that time. Yet, we are in even more uncertain macro backdrop than last year.
My concern is if the guide was intentionally provided to soften the blow for Q4’s product revenue meanwhile management has zero visibility to provide reliable guidance of this kind. I bring up zero visibility because at one point, management admitted to not having enough visibility to know how RPO will turn out for Q4, and yet they’re guiding early on FY2024 revenue.
The Q4 guide of 50% is only acceptable if there is no further decel. Otherwise, analysts will model a lower FY2024 and that would have hurt the price quite a bit. The motivation here is clear to me (give a full year guide that implies no deceleration) but how realistic is this? I discuss my thoughts in more detail below under Additional Notes.
Snowflake Financials Overview:
Snowflake beat on product revenue in Q3 with revenue of $522.8 million, and growth of 67%. Management had guided for $502.5 million, at the midpoint. Total revenue tracks in line with product revenue for revenue of $557 million and growth of 67%.
I’ve got a miss on Q4 in my notes as the product revenue growth of 49% to 50% will cause total revenue to fall short of estimates at 53.4%. MarketWatch also confirmed this is miss on product revenue with management guiding for $537.5 million at the midpoint while analysts were expecting $553 million.
The full year is in line with management guiding for $1.91 to $1.92 billion in product revenue, compared to analyst expectations of $1.92 for growth of 68%. Total revenue for the fiscal year is expected to be $2.04 billion for growth of 68%.
GAAP EPS was in line at ($0.63) although this is steeper than the ($0.51) EPS in Q3 last year. The adjusted EPS of $0.11 beat estimates of $0.04.
There were no surprises with the gross margins, GAAP and adjusted GM across total revenue and product revenue were all in line.
GAAP operating margin of (37%) was better than previous quarters. Adjusted operating margin of 8% was also better than previous quarters and came in higher than the 2% guidance offered by management.
GAAP net margin of (36%) was also better than previous quarters.
Snowflake silences the debate on if stock-based compensation affects stock price. The company paid SBC of $229 million in the most recent quarter, or 43.8% of revenue. Yet, the market overlooks this high SBC margin and Snowflake trades at the highest valuation in the cloud universe.
Key Metrics:
RPO was in line at $3 billion with a slight acceleration from last quarter, at $2.7 billion. As stated on the forum prior to the earnings report, “For Snowflake, the market has accepted flat sequential growth on RPO as it really comes down to Q4 for Snowflake — this is where the majority of RPO growth happens sequentially. Last year, the company had sequential Q3-Q4 RPO growth of 30%.”
Net retention rate of 165% is lower than 171% reported last quarter but still a category leading number.
Within customer growth, Global 2K customers accelerated from 15% last quarter to 18% this quarter. The customers with TTM > $ 1million decelerated although still healthy at 94% growth.
Total customer growth was at 34% compared to 36% growth last quarter.
Additional Notes:
My contention is that with the 51% growth estimates — and now management’s guide for 47% — this assumes consistent consumption as we move into a possible recession.
The estimates pictured above help to reveal how little variation there is built into throughout FY204 estimates, and yet this year has shown us Snowflake is capable of wide variability. There are some flat quarters, such as Q1 to Q2, but inevitably there was a strong decel and it’ll require serious trust in management to assume no further material decel from Q4.
Here is what was discussed in the call:
“Sanjit Singh
This is Sanjit Singh for Keith. I wanted to go back, Mike, to some of the guidance framework that you laid out for us, particularly with respect to fiscal year '24, I think you talked about 47% growth. Is there any way you can sort of draw the bridge for us in terms of next quarter you're guiding to think about 49% at the high end; and then for the full year next year, approximately 47%. What sort of gives you the confidence that your Q4 exit growth rate is going to be durable going into next year?
Mike Scarpelli
Sure. Well, I'll say Q4 is — it is a quarter that has a lot of holidays in it, and we do think we've lived through COVID that people are traveling more. There is a big human component as well, too. So we all along have been forecasting that Q4, we'd see the impact of that, but we also have a number of significant customers that we have signed up, that we see them ramping up next year on Snowflake as well as some of the things we're doing with Snowpark with Python, we're starting to see traction in that as well, too. But we think that's going to be more of a 2024 impact.”
Product revenue is expected to grow 3% between Q3 and Q4. Last year, it grew 15.3% sequentially. So, even with the holidays being in Q4, the slowdown is much more prevalent this year than last year’s comps.
Notably, we covered Snowpark with Python last quarter and agree it’s a strong offering that investors should pay attention to. General availability went live Nov 7th.
There was a moment that Snowflake discussed October being weaker than expected, which further complicates a bold FY2024 guide.
“Gregg Moskowitz
Congratulations on delivering very healthy product revenue in this environment. My question relates to Q4, where obviously the product revenue guidance was below where consensus was. And I'm curious, how much of this Mike is a reflection of a moderation in consumption in the month of November or over the last six weeks, as you said, in APJ and across the SMB as opposed to embedding more conservatism amid the existing macro uncertainty. Would you say it's tilted more towards one versus the other?
Mike Scarpelli
Well, the way we do our forecast is based upon historical performance, and we definitely did see a slowdown in the month of October, not that dramatic, but we typically would see week-over-week growth and we saw a number of weeks where it was pretty flat. I will say November is starting to tick back up again, and that's all factored into the guidance given the macro backdrop we have right now.”
Conclusion:
Thankfully Snowflake is not down 20%+ right now like many of its cloud peers. Yet, I can’t quite get comfortable with the FY2024 guide as it assumes no further decel from a company that decelerated quite a bit from the last year’s Q4.
As you saw today, we are not looking to go to the river with a stock that is priced 30% higher than its peers in a cloud-conscious market and that has now provided a guide that is hard to believe. Snowflake is capable of exuberant price action so we will us technicals for entries and exits.
