Snowflake Inc. Q1 FY2022 Earnings Call

Good afternoon, and thank you for joining us on Snowflake's Q1 Fiscal 2022 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 first quarter of fiscal 2022 and discuss our guidance for the second quarter and full year fiscal 2022. 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, 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 our most recently filed Form 10-K for the fiscal year ended January 31, 2021, and the Form 10-Q for the quarter ended April 30, 2021, that we will file with the SEC. We caution you not to 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 and 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. Good afternoon, everybody. We reported strong Q1 results with 110% year-on-year growth to $214 million in product revenues, reflecting strength in Snowflake consumption. Remaining performance obligations grew 206% year-on-year to $1.4 billion, indicating strength in sales across the board. While maintaining a net revenue retention rate of 168%, we also generated $23 million of adjusted free cash flow in the quarter. We are expanding our geographical scope in all three major theaters. Both EMEA and APJ have breakout bookings quarters. EMEA grew more than 200% and Asia Pacific grew more than 300% year-over-year. At the end of Q1, we had 104 customers with over $1 million in product revenue, an increase from 77 in the previous quarter. During Q1, we had key enterprise wins, including Datadog, Equifax, and Walgreens Boots Alliance. Our growth trajectory is a function of several factors. First, the modernization from on-premise to cloud computing is changing the landscape. Customers are moving workloads to public clouds to take advantage of unlimited capacity at scale and the utility model with less than paid by the drink. Secondly, through Snowflake's cloud-native software architecture, customers achieve remarkable gains in performance, economy, and data governance. Third, customers are now seeking to transform from a world where data informs people to one in which data drives operations directly. Data drives digital transformation. Data is the beating heart of the modern enterprise. And Snowflake is becoming a core infrastructure to the digital economy. The data economy has seen some lift from the pandemic dislocation, but these are our long-term secular trends enabled by new technology. Aside from pent-up demand, the possibilities are only limited now by one's imagination and budgets. Part of our growth at scale strategy has been our transition to the Data Cloud. Our original focus on targeting legacy data warehouse workloads is going strong, and that will continue indefinitely. It has been a tried-and-true strategy for Snowflake. Snowflake has now processed more than 1 billion queries in a day, and that number grew more than 100% year-on-year. But our view of the future is more ambitious. We seek to build and deploy core infrastructure for the digital economy, and the Data Cloud is exactly that. Data Cloud is an active dynamic hub of thousands of data relationships between Snowflake parties. Many of these relationships are with data providers through the Snowflake Data Marketplace and many others are our key business partners. Data providers like ZoomInfo and Foursquare are using the Data Cloud to unlock more value to their business. Health care organizations are using data insights to improve the quality of patient care. Retailers like Albertsons are sharing data with consumer packaged goods companies, and media companies are accelerating advertising revenue with the Snowflake Data Marketplace. Historically, data warehouses refreshed through large batch processes on a periodic basis. That's because data was force-fed into them from different sources. Today, the Data Cloud is near-real time with data continuously pulsing through the cloud being analyzed and acted on, lights out and at light speed. There are no limits anymore on how many analytical processes can run concurrently against the same data and how frequently they are run. This has changed people's perceptions of what is possible. The Data Cloud is the sum of all data networking relationships that are active at any point in time. We track these relationships through what we call edges. At the end of the quarter, 15% of our rapidly expanding customer base had data edges in place with external Snowflake accounts compared to 10% a year ago. And the number of edges in this period grew 33% quarter-on-quarter. Customers share data for many reasons that are specific to them and their industries, but they all seek to enrich their data, gain more effective analytical insights, and do so faster and more cost-effectively. Snowflake's focus on vertical industries is well underway. We've organized our organization around six core verticals. They are financial services; health care and life sciences; retail and consumer packaged goods; advertising, media and entertainment; technology; and public sector. This vertical industry focus will intensify across our sales, marketing, alliances, product, and service organizations. As a result, we expect Snowflake to become as visible and a large enterprise IT environment as in the line of business themselves. While the company maintains a geographical backbone in markets around the world, the industry aperture is rapidly coming into focus. Our partners are also stepping up to Snowflake, which is a key element of our strategy. Deloitte crossed the $100 million mark on Snowflake Business, which was the fastest ramp ever from a standing start for an alliance. We will host the annual Snowflake Summit June 8 through 10. More than 50,000 attendees are expected, including 60-plus customer sessions with the likes of Adobe, BlackRock, Capital One, Goldman Sachs, Instacart, Kraft Heinz, JetBlue, Morgan Stanley, and NBCUniversal. We invite investors to attend, get a better understanding of our Data Cloud strategy, and hear the latest news on platform enhancements, optimization, data governance, and vertical industry use cases. In closing, Q1 was a great start to the fiscal year, and we are much looking forward to the balance of the year.

Thank you, Frank. We saw continued momentum in Q1 with another quarter of great execution at the start of our fiscal year. Our Q1 product revenues were $214 million, representing a 110% year-over-year growth. Our remaining performance obligations were $1.4 billion. Media and telecom, technology, and financial services customers drove the outperformance, and we saw meaningful growth from our health care customers. Our strong RPO results reflect more multimillion-dollar relationships with particular strength in the telecom and technology sectors. Of the $1.4 billion in RPO, we expect approximately 54% to be recognized as revenue in the next 12 months. Growth in our existing customer base continues to propel our results. We added 393 net new customers in Q1, including three 7-figure new logos. These customers only accounted for 1% of revenues. We are hyper-focused on penetrating the largest enterprises globally, as we believe these organizations provide the largest opportunity for account expansion. We are already benefiting from our maturing enterprise sales efforts. In Q1, the number of customers with greater than $1 million in trailing 12-month product revenue increased to 104, up from 77 last quarter. When we expand within our largest customers, we typically replace more than one solution. In many cases, we replace on-premise and first-generation cloud solutions, and we address new workloads. Snowflake creates use cases that were previously impossible. This is what fuels our 168% net revenue retention rate, and we remain confident that our net revenue retention will stay above 160% for the fiscal year. We continue to invest in our international opportunity and believe there is significant runway ahead of us. As Frank mentioned, we are seeing tremendous growth within EMEA and APAC geographies as our sales organization takes shape. We believe we are in the early innings of addressing the largest enterprises abroad. First quarter was a record hiring quarter for us. We onboarded 436 net new employees. We continue to target the highest performing employees, prioritizing talent acquisition in product, engineering, and enterprise sales groups. Turning to margins. On a non-GAAP basis, our product gross margin was 72%, up 600 basis points from last year. Favorable cloud service agreements, growing scales across regions, and our enterprise customer success all contribute to steady gross margin improvements. Operating margin was negative 16%, benefiting from revenue outperformance. Our adjusted free cash flow margin was 10%, positively impacted by strong collections from Q4 bookings and operating margin outperformance. As a reminder, adjusted free cash flow excludes the impact of net cash paid or received on both employee and employer payroll tax-related items on employee stock option transactions. This quarter, we saw a $10 million impact from those items. While we continue to focus on long-term margin expansion and profitability, we do experience free cash flow seasonality. In fiscal '21, Q1 and Q4 were our strongest free cash flow quarters, while Q2 was our weakest. We expect to experience the seasonality in future periods. We maintained our strong cash position with approximately $5.1 billion in cash, cash equivalents, and short-term and long-term investments. Snowflake Ventures leverages this position to evaluate strategic opportunities with announced investments in ThoughtSpot and DataIQ in the quarter. We continue to provide high-growth companies with capital to engage more with the Data Cloud. Now let's turn to our guidance and outlook. For the second quarter of fiscal 2022, we expect product revenues between $235 million and $240 million, representing year-over-year growth between 88% and 92%. Turning to margins. We expect, on a non-GAAP basis, a negative 19% operating margin, and we expect 297 million weighted average shares outstanding. For the full year fiscal 2022, we expect product revenues between $1.02 billion and $1.035 billion, representing year-over-year growth between 84% and 87%. This includes an estimated negative $13 million impact from a storage compression improvement we just introduced that benefits our customers. We regularly introduce product and performance enhancements that lower the cost for our customers to run Snowflake, and we believe this will drive more compute within the platform longer term. Turning to profitability. We expect, on a non-GAAP basis, a 72% product gross margin, a negative 17% operating margin, and breakeven adjusted free cash flow, and we expect 299 million weighted average shares outstanding. Our outlook still assumes that we will add more than 1,200 net new employees during the fiscal year. With respect to COVID, our forecast assumes that we will continue to work remotely for the foreseeable future, with an increase in travel expenses in the back half of the year. While we anticipate an eventual return to the office, we do not have a specific timeline for that goal. And lastly, we will host our first virtual Investor Day on June 10 in conjunction with the Snowflake Summit. You can register for the event at investors.snowflake.com. With that, operator, you can now open up the line for questions.

Mike, maybe I'll start with you and a quick follow-up for Frank. Consumption in Q1 here was very strong, a $35 million increase in product revenue and another triple-digit product growth quarter. As you look at kind of Q1 consumption trends, any seasonality clearly didn't show up. Was that surprising? Any other surprises just as you looked at individual customer consumption trends that drove the outperformance in Q1?

Our revenue is directly linked to actual customer usage, rather than being recognized in a predictable manner. We experienced some outperformance with specific customers, which is associated with particular projects they are undertaking. It's important to note that just because a customer uses a certain amount in one quarter, it doesn't guarantee the same level of usage in the next quarter if those projects are not ongoing. We are pleased with the revenue outperformance in Q1, and our guidance indicates our expectations for the remainder of the year.

Got it. And then, Frank, just following up for you here. If you think about kind of the data sharing opportunity, it clearly seems to be catching on like wildfire, so much so you're starting to see the creation of even new open-source projects that are also tied to data sharing. As you think about the 27 net new $1 million-plus customers, do you think data sharing is now contributing to these $1 million-plus customers? Or do you think a bulk of the big spend is still tied to kind of replacement opportunity around data warehousing and the data share drivers still to come?

Well, Brett, the answer is really both. Customers need to walk before they run. So a lot of their initial focus is on workload transitions and so on. But everybody has a very keen view in terms of where they want to be and where they're going to be over time. And you're exactly right, data sharing is absolutely essential. It will really enable data sciences in order to create context around data to enrich data to really fully reach that potential. I mean it's taken us some time to really evangelize this whole idea. But as you said, it is resonating very, very aggressively in the marketplace. We have a lot going on in our vertical markets that are very specific to those contexts, very specific to the unique circumstances of vertical industries. So we're really excited. We're very well positioned for it. And we have really developed our Data Cloud and our Snowflake Data Marketplace to the point where it's completely operational. And hope we'll see you at our Investor Day because not only we want to talk about it, we're also going to show you a bunch of stuff and see how far we've come in that area.

Excellent. And very nice quarter. Frank, I wanted to continue the discussion on edges and the percentage of customers that you're kind of adding, the edges going from 10% to 15% and the amount of edges up 33% quarter-on-quarter. Is that something we should think about as going to directly impact consumption? Have you seen that the more edges the customer have, the more data consumption is going on within their data warehouse? Or is this more of a construct about stickiness? Once you're getting granted all these partners, you're never going to stop using the Snowflake solution. How should we think about the financial impact of this growth in edges?

The answer is both; it's definitely going to create increased stickiness. However, for something to be considered an edge, it needs to demonstrate a certain level of durable consumption over time. We focus on edges that are both stable and lasting, as many data relationships can be fleeting, only relevant for a specific project or trial. We track metrics that help us identify what we define as stable or durable edges. These edges should exist over extended periods and contribute to consistent consumption. So to answer your question, yes, it is absolutely both.

Got it. And if I could sneak in one follow-up for Mike. 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 3 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?

I'm not going to guide towards having $1 million customers. I can say that, similar to last quarter, several customers are close to reaching the $1 million mark, and we continue to see strong growth. However, it's important to remember that when we acquire a customer, it typically takes about 6 to 9 months, with closer to 9 months being more accurate, before they begin to consume at their contract rate. This growth reflects our focus on larger customers over the past year and a half. Of the 104 customers, about 25% are major customers, with the remainder being enterprise customers, including those in the Fortune 500. Only a quarter of our customers are from the Fortune 500, and the others span a wide range of end customers. Even smaller companies can be significant consumers of our service, and many of them are on the verge of making that leap. We anticipate this trend to continue.

Great. Congrats on a great quarter. 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.

That's great. And maybe one for Mike. 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.

Congratulations on the quarter. I have two questions. First, you mentioned the ongoing replacement of data warehousing. Could you elaborate on that? I'm intrigued because it appears to me that data warehousing is just a small part of the broader database market. However, your comments suggest it represents a longer-term growth opportunity that is central to the business. Secondly, Mike, I noticed that your guidance doesn't seem to account for a significant increase from this beat. Is that because you prefer not to predict increases in consumption revenue? Is that why the revenue forecast for the next quarter is conservative?

Yes. Kash, Frank. Yes, we're actually super early innings on replacing these legacy on-premise data warehouses license. And actually, you see that in some of Teradata's numbers that they're actually hanging on to their business, one of the reasons it's been. We think Snowflake has really been the only company that's been successful in transitioning these legacy systems. We've not seen it done successfully by the public cloud companies. So most of that opportunity is still there and it's still coming. That's why I think it is, for all intents and purposes, indefinitely. So much of our business is actually not coming from those sources. But our expectation is that it will continue to contribute materially to our business for a very long period of time.

In response to your question, Kash, we did incorporate the recent performance into our full year guidance, along with an additional $1 million. However, we are also facing challenges for the full year. As I noted earlier, we introduced new storage compression technology that we have just launched. Based on initial feedback, it is projected to reduce our revenue by about $13 million because the benefits of our storage for customers are significantly greater than we anticipated. This change is advantageous for our customers, and in the long run, it will encourage them to store more data in Snowflake, ultimately leading to increased consumption.

Wonderful. Frank, I’d like to follow up quickly. The hyperscalers offer their own cloud-based data warehousing. Why has Snowflake managed to maintain its position against them? I understand they are your partners, but at times you do compete in this market. Are there any structural barriers or advantages that you have over the hyperscalers with their own cloud-based data warehouse?

Well, I can go on and on about what all the reasons are. But for the purposes of this call, one of the things that makes Snowflake completely different is that our founding team started with a clean sheet of paper. They obviously were deeply steeped in database technology over a very long period of time. And they were looking to absolutely not carry any legacy forward that they didn't like and really reinvent architecturally for cloud scale computing, which is very, very different from on-premise. So it was incredibly different, very, very innovative. As a result, we're not straddling the on-premise and public cloud environments. We're only in the public cloud. And it's very important. I mean you look at a lot of the public cloud companies. They have carried, not only architecture, but actual code forward from our private environment. They've tried to evolve that and adapt that. The thing that we always say is say, look, it's hard to catch up when you're not sitting on a good architecture. You're only going to get further behind. Architecture matters. It matters a whole lot. And this is really what the strength of Snowflake is rooted in its core architecture, something you should never lose sight of.

Frank, I was wondering if you could maybe just expand a little bit on your comments on the verticals. It seems to me, when we start thinking about the data sharing opportunity, landing some of those key beachhead clients in each vertical is going to be really important to sort of build out beyond that. And I guess, along those lines, I was just kind of curious where you think you are in each of those six verticals. There's a couple that are maybe ahead of the game, on sort of building out sort of real market knowledge, having salespeople understand the intricacies of each of those verticals versus maybe the ones that you still need to do some work on.

That's a broad question. I encourage you to visit us at Summit, where we will showcase many customers in these sectors. You can hear directly from them about their projects and approaches. Our largest vertical, which might surprise some, is media, specifically in streaming content and advertising. This isn't too surprising, as companies like Hulu, Disney, Comcast, and NBCUniversal operate in a digital-to-consumer model. They are highly sophisticated and advanced, especially given the dominance of advertising from Amazon, Facebook, and Google, making it crucial for them to develop their businesses using Snowflake. This is a prime example of a sector very active with Snowflake due to their strategic challenges. The second largest vertical is financial services, which may not include large financial institutions but still represents a significant area, as software companies often focus on healthcare and life sciences. Retail and consumer packaged goods are also major sectors for us due to extensive digital transformation in those areas, along with significant advertising activity. The public sector is a substantial part of our business, with many software companies re-platforming on Snowflake, integrating it into their core technology stack. There are many dynamics at play in our landscape. We're thrilled about the progress we've made as a company; we've evolved from being focused purely on architectural distinctions to truly addressing our customers' business challenges and outcomes, making us a much more valuable partner than before when we primarily concentrated on migrating workloads from on-premise to the cloud.

Yes. That's really helpful. And Mike, if I could just squeeze in a really quick one. Given your consumption model and we're heading into the summer season, is there any way to think about in terms of seasonality from just consumption over the summer? Over the years, we've seen sort of bookings trends obviously come down a little bit in say the third quarter. Is there anything we should consider in terms of your full-year guidance on that front?

First of all, it's included in that, but there is more seasonality on weekends, mainly because there are fewer employees in the office, although many of our workloads still operate on weekends. So consumption doesn't just drop to zero. Around holidays, you do notice some changes, but there isn't a significant decline in consumption due to people taking vacations in December. We really haven't observed that.

Okay. Maybe 2 for Mike. Mike, any noticeable change in the revenue mix between Snowflake on AWS versus Snowflake on Azure? And then I've got a quick follow-up.

I will still say AWS is still our biggest. But Azure from new bookings, as we get into large enterprises, that continues to increase as a percent. But still, AWS is our biggest from new bookings.

Okay. Makes sense. And then, Mike, just as a follow-up, interesting on the storage compression change and the delta in terms of the revenues. I'm just wondering whether that's symbolic of any change in pricing strategy. Maybe you, Frank and the team have a greater willingness now to pass these types of cost savings on to customers to drive future growth. Or was this change a little bit more one-time as opposed to a real high-level pricing strategy change?

Well, I'll be transparent. I learned a lot in this process. So this is something the company has historically done about every 2 years. There's a big focus on new compression technology for storage. And the impact of it was bigger than we would have thought. And we only knew that once we actually got real live examples from customers. And our philosophy has always been to pass that on to customers. But there are other performance improvements as well. For instance, we're working on a new chip technology that will dramatically increase performance or improve performance. We do expect that to have an impact, and that's more of next year you'll see that. And we have always done that and continue to improve the performance of our product that goes directly to the benefit of our customers.

Congratulations. I had a follow-up on secure data sharing. So as that ramps, naturally, your consumption is going to rise by a lot but so too will the complexity of all the data sets being shared in all kinds of intricate ways. And so I'm wondering, do you have any concerns about maintaining a high level of security and governance on the platform as that unfolds?

It's Frank. The answer is no, not really, because data sharing is completely integral to our architecture. In other words, we're deploying the exact same security model that we deploy for internal as we do for external security. So as I said earlier, architecture matters. And this is one product that is beautifully designed, doing exactly what it does. It is not a bolt-on. It's not a hack. It's just incredibly well implemented. So the answer would be no to your question.

Both EMEA and APAC performed better than expected, achieving very strong results this quarter. We secured a multimillion-dollar deal in EMEA with a major pharmaceutical company and also acquired a significant customer in Japan. Overall, the performance in both regions was very strong.

Congrats from me as well. A quick question. Frank, as you look into the replacement cycle, and you kind of pointed out you're the one that actually does it properly, what do you think around the partner capacity to help you there? You mentioned Deloitte already, obviously, as kind of one big one, but I assume just getting off of Teradata is actually quite a big job with kind of a lot of extra work involved. How happy are you with the channel there? And then I have one follow-up for Mike.

Well, we're happy in places I highlighted. Our relationship with Deloitte, who is our lead partner, they went from a standing start a little over a year ago to $100 million of business, which is an absolutely ripping trajectory that they're on. It just shows here that demand for these migrations is enormous. We have a lot of engagement from all the other big names out there, whether it's Capgemini or Infosys, obviously, Accenture and so on. But they're all scrambling to certify, to staff, to provision. Our professional services organization is actually, by far, the best at this. And that's obviously a logical consequence of the fact because this is all we do. So we're really using our own abilities to help leverage them into the business. And it's not easy because the ramp is so steep for everybody, and we've got to make sure that we do an absolutely terrific job for our customers because these migrations are not easy; they're not cheap; there's risk involved; and so on. And that's really the friction in the marketplace. So it's actually very welcome that the system integrators are leaning in as hard as they are, but the enablement for them to become really effective large grown businesses is sort of the day-to-day challenge that we have. But I view it as all good work that we do.

Yes. Okay. Makes sense. And then, Mike, the storage compression, et cetera, like does that impact gross margins? This might be a stupid question, but like the 72% is really, really high. So now everyone is wondering like how do you manage to get so quickly there and is there kind of more upside next year with more compression, et cetera? Or is it totally unrelated?

Well, what I will say is it does improve margins. And the way it improves margin is because storage becomes more efficient. Storage is a smaller component of the overall mix of the revenue, and compute is the real value of our software that drives more margin. And I will say we did roll this out in April, and you do see some of that coming into an impact on last quarter. But we did say at our IPO, if you remember, we thought we could get to the mid-70s. That might feel very good that we'll get to the mid-70s. It's going to take some time. And stay tuned for our Investor Day, and we'll talk more about that later. I would say the biggest improvement we've seen to date in the gross margin has really been the renegotiation of our contracts with our cloud vendors and the discipline in our sales organization around discounting and coupled with the fact that as we move into larger enterprises, we're selling more business-critical enterprise, which attracts a higher contribution margin.

Mike, just on quota-carrying reps this year. If you're not giving a number, can you just give us a sense of are you going to keep the same trajectory of growth you added last year or trying to get more productivity out of the reps you added? Just any color around on the quota-carrying side would be helpful.

Well, we don't disclose quota-carrying reps. And what I will say is we're going to add about 1,200 net employees for the full year, and we do expect that we'll add about the same level into our sales organization this year as we did last year.

Frank, I want to ask about Snowflake Ventures. You called out ThoughtSpot, DataIQ. I know DataRobot's in the portfolio. So obviously, analytics and ML, AI are logical targets. Just curious like where else are you seeing interesting stuff happening in the ecosystem as it pertains to driving volumes to Snowflake?

Yes. Areas like governance. Obviously, governance is becoming such a huge aspect of data operations in large institutions. When I say governance, it really relates to security as well as probably to see compliance. So we actually acquired a company last year by the name of CryptoNumerics, and that is now actually flowing into our platform, and we have the ability to anonymize PI data and things of that sort. Super, super important that customers can really feel safe on our platform and they allow data on our platform, that it is fully governed. I mean it's been a big issue, but it's literally growing in importance quarter-on-quarter. And a lot of our large customers are really organizing themselves to maintain that kind of posture. There's areas in data cataloging. I mean there's a whole ecosystem around our platform. What we like about investing is not just the upside in terms of the investments, but we get to build closer relationships with these customers on the basis of the investments, much more seamless integrations, better customer experiences. And that's what we like to do. I mean we're very much an ecosystem-oriented company rather than we have one flavor, and that's what you're going to use. We want to make sure that the whole ecosystem feels like a very good experience to our customers. So we look for opportunities. We see a lot, and we're happy with the number of investments that we've done, and we're looking at new stuff continually, yes.

Yes, there are already some strong performers in the portfolio. Mike, following up on your point, Raimo inquired about gross margins related to storage compression technology. I'm curious about the trajectory as you expand into handling more unstructured data, which I believe demands significant storage. How should we approach thinking about gross margins as we aim for that mid-70s target? Is it reasonable to anticipate a dip in the short term, or how should we consider this?

I don't see a dip happening in our product gross margins at all, but there is a limit to where you can get to. And when we're going through our IPO, people were asking questions. I did say I don't see us getting into the 80s. I can see a path to the mid-70s. We may, one day, be able to get into the high 70s. But given the storage component and the costs associated with the public clouds are in there, it's pretty hard to get beyond this.

Mike, I think last quarter, you talked about investments in FedRAMP. Can you maybe give us an update where you stand? And do you think the federal vertical could be a contributor in fiscal '23?

So there's FedRAMP high we're working on. ITAR is going to be out mid this year, FedRAMP high end of the year. And obviously, if we didn't see a big opportunity, because there is a big cost associated with doing that, we wouldn't be doing it. And we have a very good pipeline within the public sector. And we're very focused on it. As of today, it's not a big driver of revenue. So there's a lot of upside there.

Maybe to start with Frank, I think earlier in the call, you talked about how kind of the legacy data warehouse migration has been a really important go-to-market motion. I'm curious, given your focus on the Data Cloud, are you changing at all in terms of the initial use case that you're leading with? Perhaps, given the success you're seeing with data sharing and data marketplace, do you find that those are easier to perhaps land a new customer with given that it's more greenfield and less of a large-scale legacy database migration?

When people transfer legacy workloads to the cloud using a platform like Snowflake, they quickly discover that these workloads can operate significantly faster. Instead of taking weeks to populate a data warehouse, users are now populating dashboards and running reports almost immediately. By the time they receive data, they're often already moving on to other tasks. This acceleration of data access changes the entire perspective on the value of data. Most of our customers are currently on a 24-hour cycle, but that is quickly shifting to accessing data in hours and even minutes. We are actively developing event-driven architectures to achieve near-real-time data access. This shift allows users to interact with data much more rapidly than before, eliminating the long waits previously associated with insights. This transformation alters how our customers perceive their data capabilities, which is fundamentally different from past experiences. It is made possible by the public cloud combined with Snowflake's architecture, leading to increased consumption and high net revenue retention rates as customers explore new use cases that were previously unimaginable. The traditional static, batch-oriented mindset of data warehouses is now a thing of the past.

And I would say we did roll this out in April, and you do see some of that coming into an impact on last quarter. But we did say at our IPO, if you remember, we thought we could get to the mid-70s. That might feel very good that we'll get to the mid-70s.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation. You may now disconnect.