Snowflake Inc. Q3 FY2021 Earnings Call

Good afternoon and thank you for joining us on Snowflake's Q3 fiscal 2021 earnings call. Joining me are Frank Slootman, our Chairman and Chief Executive Officer; and Mike Scarpelli, our Chief Financial Officer. During today's call we will review our financial results for the third quarter fiscal 2021 and discuss our guidance for the fourth quarter and full year fiscal 2021. During today's call we will make forward-looking statements, including statements related to the expected performance of our business, future financial results, strategy, long-term growth 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 and in our SEC filings including the Form 10-Q for the quarter ended October 31st, 2020, that will be filed with the SEC today. We caution you not to place undue reliance on forward-looking statements and undertakes 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 to financial measures calculated in accordance with GAAP. If you see the reconciliation of these non-GAAP 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.

Thanks Jimmy, and good afternoon everybody, and thanks for joining us on our inaugural earnings call. Let's review the results. We saw strong consumption trends across our customer base in Q3, with product revenue growing 115% year-on-year to $148 million, and a net revenue retention rate of 162%. Coupled with this rapid growth, we continue to see improving unit economics, cash flow, and operating efficiency. Our growth is driven by long-term secular trends in data science and analytics enabled by cloud scale computing. With the onslaught of digital transformation, data operations have become the beating heart of the modern enterprise. The pandemic has been more or less neutral to our business. Some businesses were negatively affected in terms of demand sentiment, but others stepped up their data strategy given the new complexities of the health crisis and economic effects. It bears repeating that Snowflake is not a SaaS business model. We're a consumption company, and our reported revenue has a direct relationship with the consumption of our platform during the period. The consumption model is variable, not fixed, meaning our model places no limits on how much of our platform our customers can consume, and this contributed to our strong revenue retention rate. The technology is now ahead of people's ability to take advantage of virtually unbounded capacity scale and performance. Over the past year, Snowflake has augmented its selling motion to campaign some of the largest enterprises and institutions in the world. Snowflake is well represented now in 8 of the Fortune 10, and we added 12 Fortune 500 customers in Q3, including Fiserv and GEICO. Interest in Snowflake is growing. We hosted our Snowflake Data Cloud Summit two weeks ago with over 40,000 registrations, up from 15,000 registrations at our Snowflake Summit in June. Shifting gears, I'd like to take a moment here and introduce you to the Snowflake Data Cloud, because it's the centerpiece of our mission and strategy. As an industry, we have struggled to mobilize our data, meaning that it has been hard to put data in the service of our enterprise, and we set out to change that. As we see it, we've never had a data cloud in the history of computing. We are used to SaaS applications as application clouds within the massive infrastructure clouds like AWS, Azure, and Google Cloud, service and storage, which you can consume by the drink. But data lives absolutely everywhere in millions of places, held hostage by machines, applications, networks, and clouds. We have long needed to blend and join disparate data sets, that's why we built data warehouses in the first place. They were expensive, capacity constrained, and required tons of data preparation and manipulation prior to use; only the largest, most demanding data sets could afford these platforms. So they were never pervasive. Snowflake changed that, drastically scaling down to the smallest jobs and radically changing the economics with a highly elastic utility model. Not only did everybody know about these great powers, Snowflake also removed constraints on data volume, performance, and concurrent workload execution; even high-end users reported being able to cut their existing spend and expand their workloads dramatically at the same time. As compelling as Snowflake was to turbo existing workloads, old habits die hard. Many customers are still evaluating data platforms one workload at a time, basically limiting data operations to their silos, that's like steering a ship by its wake. Future workloads will look different, with machine learning and data science becoming ultimate users. The workload and mentality leads to building the silos of the future. The Snowflake Data Cloud is a data universe, a global data orbit, where Snowflake users can effortlessly plug in, discover, explore, and access data from an incredibly growing variety of sources. It's a different way of thinking about the data needs of the future. The Snowflake Data Cloud combines world-class execution with unfettered data access. Customers need both. We are seeing promising signs of adoption, with already 23% of our customers using our data sharing capabilities. We also continue to onboard new data providers, and in Q3 we added Standard & Poor's Global, Morningstar, and Core Logic to name a few; and we now have over 100 data providers on our marketplace. At the Snowflake Data Cloud Summit, we heard from customers about the impact that the Data Cloud is having on their business. The retail rewards customer has fully embraced the Data Cloud. Snowflake allows them to securely share data sets with media partners and power customer-facing applications to target their end users. Commercial data providers are also turning to Snowflake to reach new customers and monetize our data by making the data available in the Snowflake Data Marketplace. Experian helped retail customers accelerate their digital transformation efforts. Experian's retail customers are now reaching shoppers aligned with insights garnered from the Snowflake Data marketplace to reach customers who are no longer shopping in stores. Let's highlight some product announcements from the Snowflake Data Cloud Summit in November. First, we've grown our partnership with Salesforce. The previously announced Apple Connector is now generally available and allows customers to more easily integrate Salesforce data with Snowflake. Secondly, we announced Snow Park, our new developer experience. Snow Park will enable users to write code in their preferred language to build data transformations and score machine learning models, all processed by Snowflake. Third, we announced support for unstructured data, in addition to our long-standing support for structured and semi-structured data. And lastly, we are enhancing our data governance strategy with the introduction of row access policies, tagging, and column masking. This will help our customers control access by user type in a highly granular fashion, very important given the heightened sensitivity around data governance. These capabilities are essential to grow on the Data Cloud, and you can expect more platform enhancements from us going forward. Before closing, I would like to highlight the upcoming release of our book, The Rise of the Data Cloud. We wrote this book because the Data Cloud is the centerpiece of our strategy and vision. We showcase many customers in numerous vertical industries with their Snowflake journeys and experiences. It's meant to enlighten and inspire, something we call the Art of the Possible. The book will be available on December 4th. In closing, we're pleased with the quarter and excited about the momentum coming out of the Data Cloud Summit as we head into the final quarter of our fiscal year. With that I will turn the call over to Mike.

Thank you, Frank. Before I discuss our results and guidance, I would like to spend some time discussing our unique and powerful business model. We are not a SaaS model; we are a consumption model. Our business model is a key differentiator for us and is designed to drive customer success. Our customers purchase credits, and when those credits are consumed, we recognize the revenue. Unlike a ratable model, we only recognize revenue if the customer uses our platform. For this reason, there is no shelfware in our revenue. For many customers, it takes several months until they are up and running at full capacity, and this model gives them the flexibility to purchase the amount they plan on using without wasting credits or exceeding their original contract if they consume more than planned. For these reasons, we do not focus on the same metrics that a SaaS business would. We focus on product revenue and remaining performance obligation. Product revenue, which excludes professional services and other revenue, is the most transparent disclosure we offer. It gives full insight into how our customers are actually using our product in the period reported. If a customer purchases credits and does not consume, their revenue will be zero dollars. We also focus on the remaining performance obligations or RPO. RPO represents all the contracted revenue not yet recognized, including both deferred revenue and non-cancelable contracted amounts that will be invoiced and recognized as revenue in future periods. Unlike most SaaS businesses, billings is not a meaningful metric for us because it is less correlated to product revenue due to the variability of consumption. I would also like to mention that our GAAP financials will now be available on the Snowflake marketplace, and we encourage all of you to consume financial information in a new way going forward. We will be publishing our quarterly results on the marketplace in conjunction with our earnings. Now let's turn to our results and guidance. For Q3, product revenues were $148 million, representing 115% year-over-year growth. Our remaining performance obligation was $928 million, representing 240% year-over-year growth, with a weighted average life per multi-year contracts of 2.5 years. This strong performance is driven by our customer base realizing the value of our platform for their existing use cases while also embracing the Snowflake Data Cloud vision. As I mentioned earlier, our business model allows our customers to consume their entire contract before the end of the term, which is what we often see. We also continue to see customers willing to make more multi-year commitments with us, which is a direct result of the value our customers can create with us as we continue to scale. We are increasingly focused on moving up market, and you can see the benefits of those investments paying off. In Q3, we saw the number of customers consuming greater than $1 million in trailing 12-month product revenue increase to 65, up from 31 in the same period last year. Turning to margins, on a non-GAAP basis our product gross margin was 70%, positively impacted by one-time credits received from a cloud service provider in connection with our new agreements. Operating margin was negative 30%, benefiting from lower than expected employee-related costs, and our adjusted free cash flow margin was negative 23%, positively impacted by prepayments coming in lower than expected and a stronger operating margin. Going forward, we will report and guide non-GAAP adjusted free cash flow. Adjusted free cash flow will exclude the impact of cash paid for employer payroll tax items on employee stock transactions. This quarter, we saw an $800,000 impact from those items. For a detailed bridge of cash flow from operations to adjusted free cash flow, please refer to our investor presentation on our IR website. We ended the quarter in a strong cash position with approximately $5.1 billion in cash, cash equivalents, and short-term and long-term investments. This capital allows us to invest in new strategic initiatives such as Snowflake Ventures, which we announced last month. Snowflake Ventures' mission is to enable more organizations to harness the power of the Data Cloud. To do this, we will invest in growth stage companies that demonstrate a commitment to mobilizing data, provide value to our customers, and expand opportunities for the Data Cloud. Similarly, we will continue to evaluate strategic tuck-in opportunities in M&A focused on talent and technology; our acquisition strategy aligns with our product strategy; everything must be done the Snowflake way, and that means delivering as one native product. Now, I would like to give an update on how we view COVID impacting our forecast. Our forecast assumes our employees will continue to be working remotely for the foreseeable future. We have proven our ability to maintain productivity during the pandemic and are in no rush to return back to the office and regular travel. Leveraging Zoom and other collaboration tools, we've been operating at a high level, enabling us to smoothly onboard over 500 employees during the pandemic. We believe we will eventually be back in the office, but until we have new information and can guarantee our employee safety, we will continue to work remotely. Now let's turn to guidance for the fourth quarter and full year fiscal 2021. For the fourth quarter ending January 31st, 2021, we expect product revenues between $162 million and $167 million, representing year-over-year growth between 97% and 103%. Turning to margins, we expect on a non-GAAP basis an implied 70% product gross margin, negative 30% operating margin, and negative 8% adjusted free cash flow margin, and we expect 283 million weighted average shares outstanding. I would like to remind everyone that because of our consumption-based business model, we do not recognize revenue immediately after the deal is booked. For this reason, you may not see a revenue beat flowing through to the next quarter like you would in a ratable business model. Just because customers consume in a certain pattern one quarter does not necessarily mean they will continue those patterns going forward. For the full year fiscal 2021, we expect product revenues between $538 million and $543 million, representing year-over-year growth of between 113% and 115%. Turning to margins, we expect on a non-GAAP basis 68% product gross margin, negative 40% operating margin, and negative 18% adjusted free cash flow margin, and we expect 255 million weighted average shares outstanding. With that operator, you can now open the line for questions.

Your first question comes from the line of Heather Bellini from Goldman Sachs. Please go ahead.

Great, thank you very much gentlemen and congratulations on the first quarter out of the gate. I wanted to ask a little bit; you mentioned keeping your employees home as a result of COVID until things are safe, but wondering if you could share with us a little bit about what you've noticed in terms of the pace of consumption trends as the pandemic has been going on and as people prioritize moving to the cloud. Can you share with us any anecdotal data about how customers might be even accelerating their pace of capacity usage with Snowflake? Thank you.

Yes Heather, it's Frank. I'll give you one example. We have a data set on our Snowflake marketplace that's listed by a company called Star Schema, which provides detailed incident of fatality rates, very, very detailed and are updated continually. And we saw almost our entire customer base access that data within days and weeks, and when that happens, it drives consumption, and that access has continued to this day. So sometimes you have catalysts in specific data sets that really help customers overlay data and run models, understand their demand environment better and so on. It's hard to generalize; this is just sort of a single anecdote that kind of stands out to us.

I would add, Heather, that we do see in certain industries like we have some customers that are in the travel industry. We see their consumption down, but we have a lot of customers that are more in the online consumer world whose business is booming, and their consumption is much higher than we're forecasting. So it all depends upon the industry they're in, but on average we're seeing our customers consume more than we would expect. That's why we ended up beating by what we did; it was a higher beat than I was expecting for the quarter.

Your next question comes from the line of Raimo Lenschow from Barclays. Please go ahead.

Congrats from me as well for the first quarter and thanks for the presentation. That was a lot of useful information in there. And, Frank, question for you, you mentioned earlier about the data formats that you are dealing with and now doing also like unstructured data. Can you talk a little bit about the evolution? Because when Snowflake started out, it was a very good relational cloud data warehouse, and then when you guys became much broader, can you talk a little bit about how you see that evolving? How quickly do you see customer adoption in the other areas of working with data coming through as well? And then I have one follow-up for Mike.

Yes, sorry, the overarching theme here is that we have evolved Snowflake from being the data warehouse in the cloud to being a Cloud Data platform. The distinction there is a much expanding scope of workloads. For those who have not been following Snowflake that long, we actually got our start processing semi-structured data, which was really a big differentiator for us going back to 2015-2016. Yes, but certainly structured relational data is a mainstay of our business. But when you're following a Cloud Data platform strategy, what happens is our customers are seeking broader workload support, broader data support, and we also announced support for geospatial data; the uptake of that new data type is just enormous. So there's ferocious appetite in our customer base for us expanding the scope of our capabilities, both in terms of workloads and in terms of data types and our ability to use external services. So it's a very broadly capable platform. Customers don't want a multitude of platforms in their environment. They're very, very intent on bringing as much data as they possibly can onto Snowflake and rolling as many workloads as they can on Snowflake, and we're running hard to enable that.

And then Mike, on gross margins, I got the 68% gross margin kind of comment you gave. Can you talk a little bit about the puts and takes in terms of that in the long run? Obviously, with bigger scale, you have more negotiations with the big cloud vendors; how is that going to change the margins going forward? Thank you.

Sure. So as you saw, for the most recent quarter, we just did a 70% gross margin, and the implied for the full year is 68%, but we're actually going to do a 70% margin in Q4. As we talked about when we were going public, I do think longer term in terms of model, we can get to the mid-70s. And it's really driven by a few things; one is better pricing with our cloud vendors. We did just renegotiate deals with two of our cloud vendors, AWS and Azure, who are the majority of virtually all of our businesses run in there today. And I do think, as we continue to grow, we'll be able to renegotiate those again. Scale, we have a lot of deployments around the world; we're not even close to being at scale, and especially as EMEA is starting to take off for us, we'll get more scale in those, which will drive better margins for us. And then also, we're seeing a lot better discipline in our field around discounting; if you see the average price per credit we're getting, it continues to increase. So those are the three things that are really going to drive that margin.