Snowflake exceeded top line expectations, as outlined on our forum here. Management focuses on product revenue versus total revenue and GAAP metrics are a bit buried under the more accessible adjusted non-GAAP metrics. However, Snowflake delivered what the market needed to see – which was 83% product revenue growth compared to 72% growth expected. The guide for Q3 was in line with expectations while FY2023 was slightly raised from $1.893B at the midpoint for 66% growth to $1.910B at the midpoint for 67.5% growth.
The top key metric to note was a re-acceleration in customers with TTM product revenue above $1 million, which was at 112% this quarter at 246 customers, up from 98% growth last quarter. This is an important forward-looking metric as it takes 9 months to fully onboard new customers. Another reason this key metric holds more weight is the consumption model means the upside is uncapped, whereas with SaaS, the monthly amount has a ceiling (usually). You can read more about the consumption model here.
Net revenue retention rate is down 300 basis points sequentially but it up 200 basis points year-over-year and this re-acceleration is what’s important. RPO growth of 78% is the lowest in reporting history, down from 82% last quarter and 122% in the year ago quarter.
Analysts did note on the call that there are tougher comps for RPO coming down the line in Q4 (quarter ending in Jan 2023). It was in this quarter that RPO moved from $1.8 billion to $2.6 billion. Right now, it stands at $2.7 billion, so not too much H1 growth over the past six months. This is simply something to note. Of this RPO, 57% is recognized over the next 12 months, or $1.5 billion.
Here is what was discussed:
Brad RebackBrad Reback
Hi, thanks very much. Mike, I know you mentioned the 3Q consumption comp. You also have a really, really difficult 4Q RPO comp. But given your commentary, should we expect a healthy end to the year given that renewal pool? Thanks.
Mike ScarpelliMike Scarpelli
Yes. We expect we will have a big increase in RPO. But I’m not guiding to it. You’ll have to wait and see. I’m never going to guide RPO.
Total customer growth was at 36% growth compared to 40% growth last quarter. As noted above, it’s the TTM > $1M that matters.
There is no denying that on a GAAP basis, Snowflake is largely unprofitable. The company’s GAAP operating margin was at (42%) compared to the adjusted operating margin of 2%. The operating losses of $207 million this quarter increased from $189 million in GAAP operating losses last quarter. Stock based compensation increased from $164 million in the year ago quarter to $209 million in Q2 2022.
Free cash flow fluctuates with $54 million in free cash flow this quarter. This is up from ($12) million in free cash flow last year. The free cash flow margin is 11% and the company raised its adjusted free cash flow guide for the year from 15% of revenue to 17% of revenue. The company has $5 billion on the balance sheet.
Moving Forward …
The top catalyst for Snowflake (in my opinion, and was discussed on the call) is Snowpark going into production with Python. It’s not open to general availability yet.
Here is what was discussed on the call:
Frank SlootmanFrank Slootman
Yes, I will start, and maybe Christian can finish. Python is – so Snowflake for Python is red hot, and people are jumping that for us to declare it GA, which is something and we have customers that are really wanting us to let them use it in production now some of the largest customers that we have. So, pressure is on because the demand is there. The thing about the Iceberg Open Table formats that really completely open Snowflake up to be – for Snowflake cables to be used by anybody and everybody that can support that format. We are seeing incredible results in terms of performance of like executing against that file format. So, these are all very, very, very promising developments for us. And I think that the pressure is on for us to declare these things generally available because people are trying to rip them out of our hands right now.
Mike ScarpelliMike Scarpelli
Yes. As we said at our Summit conference, we expect those to be GA at the end of this year. So, a meaningful contribution to consumption will happen next year.we expect those to be GA at the end of this year. So, a meaningful contribution to consumption will happen next year.
Here is what we’ve said in the past:
“Snowpark offers the ability to migrate business logic with popular programming languages Python, Scala/Java Virtual Machine or Java. The library and DataFrame API allow querying and processing data without having to move data to where the application code runs. This extends programming functionality for ML model training and allows data processing to run natively in the data cloud.
Prior to Snowpark, code deployment required separate infrastructure. Building applications that interact with Snowflake’s virtual warehouses minimizes processing time and lowers the learning curve/broadens adoption of complex data pipelines by removing the need to move or copy data into other systems to overcome working with SQL.
The recent announcement of adding Snowpark for Python is key because of Python’s widespread popularity among developers. With the Snowpark Accelerator, Snowflake is courting developers to build more applications and this is likely to help Snowflake maintain a competitive advantage with a newer class of machine learning startups.”
Nvidia …
Nvidia remains one of our highest convictions and we’ve laid out those reasons in great detail. We will provide an earnings overview soon but you’ve likely already heard through the pre-announcement that gaming was down 44% sequentially. The company’s guidance also missed by $1 billion with $5.9 billion guided versus $6.9 billion expected.
Nvidia is undeniably the highest priced semiconductor, as well, and the one issue investors face when a company misses on EPS (noted in the pre-announcement) is the valuation gets richer overnight. Nvidia has been trading in the 30-35 forward P/E ratio range, yet is now in the 46 forward PE ratio range.
It’s likely we trim here a bit here and re-allocate (perhaps to Snowflake tomorrow). The position is large so the trim is not for lack of conviction, we can promise you that. We also won’t hesitate to buy back again.
