Earnings Call Transcript - SNOW Q3 2022

Operator, Operator

Ladies and gentlemen, thank you for standing by and welcome to the Third Quarter Fiscal Year 2022 Snowflake Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. I would now like to turn the conference over to your speaker today, Jimmy Sexton, Head of Investor Relations. Please go ahead.

Jimmy Sexton, Head of Investor Relations

Good afternoon and thank you for joining us on Snowflake's Q3 fiscal 2022 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 will join us for the Q&A session. During today's call, we will review our financial results for third quarter fiscal 2022 and discuss our guidance for the fourth 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-Q for the fiscal quarter ended July 31st, 2021 and the Form 10-Q for the quarter ended October 31st, 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 both 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, CEO

Thanks Jimmy. Good afternoon everybody. We saw momentum accelerate in Q3 with product revenues growing 110% year-on-year to $312 million and remaining performance obligations growing to $1.8 billion. The net revenue retention rate expanded to 173%, and we recorded our first positive non-GAAP operating income in the company's history. Our Q3 Fortune 500 customer count totaled 223, increasing by eight in the quarter, and we now have 148 customers with trailing 12-month product revenue greater than $1 million. Our growth is driven by a diverse mix of customers, the 10 largest consumers in Q3 include four Fortune 500 companies, four companies less than 10 years old, and a Powered By Snowflake program partner. We continued our international expansion with product revenue from EMEA and Asia-Pacific outstripping the company's year-on-year growth, up 174% and 219% respectively. We recently launched operations in three new countries: Israel, Korea, and the United Arab Emirates. Vertical industry focus is an important evolution of our selling motion, especially in global enterprise accounts. During the quarter, we announced two industry data clouds. The Financial Services Data Cloud brings together to Snowflake platform partner solutions and industry data to help financial services organizations mobilize their data. Customers can launch products, build FinTech platforms, and accelerate their compliance on top of Snowflake. Industry-leading customers including Allianz, Blackrock, Capital One, New York Stock Exchange, Refinitiv, Square, State Street, and the Western Union are all part of the Financial Services Data Cloud. We also launched the Media Data Cloud, which enables media and advertising companies to share data for audience insights and measurements. With data clean rooms enabled by Snowflake, advertisers, agencies, and publishers can design their own collaborative environments. The Media Data Cloud includes industry leaders like Disney Advertising Sales, Experian, Horizon Media, and The Trade Desk. We're teaming up with Disney Advertising Sales to provide the infrastructure underlying their new data cleanroom solution. Together, Snowflake and Disney Advertising Sales enable data collaboration for compliant and secure advertising. We launched our Powered By Snowflake program in June to help companies build and promote applications into Data Cloud. Powered By Snowflake is designed to accelerate the delivery of cloud applications on Snowflake. To date, there are over 175 Powered By Snowflake companies who have access to technical resources to design their applications. In October, we held a Snowflake BUILD Summit, which focuses on software developers, data scientists, and data engineers. The event received over 20,000 registrations, which was three times last year's BUILD events. Attendees got a closer look at new applications leveraging Snowpark, which brings programmability to Snowflake and is in public preview. Developers explored how new Java user-defined functions are expanding what is possible with Snowflake. Updates to the Snowpark Accelerated program were also announced at BUILD. Snowpark Accelerated provides partners with access to technical experts and market exposure to Snowflake customers. Snowpark provides programming language choice to Snowflake's Data Cloud. Customers can access pre-built partner capabilities and integrations. It is leveraged by companies such as DataIQ, DataRobot, and H2O.ai. At our recent Snow Day event with more than 23,000 registrations, we announced that our customers can now use Python natively within Snowflake. With Snowpark for Python, developers will be able to easily program with a widely popular language. They can also leverage the security governance and performance of Snowflake. Snowpark for Python is currently in private preview. During the quarter, Snowflake invested in Anaconda to bring enterprise-grade Python capabilities to the Data Cloud. Together, we enable the Python community to build secure data pipelines and machine learning capabilities. Anaconda partnership will enhance the Snowpark experience to extend programmability with Snowflake. Last year, we issued our first Startup Challenge; 700 companies from 56 countries competed to build a data application with Snowflake. We announced our second Snowflake Startup Challenge at BUILD with an opportunity for up to $1 million in total investment. Snowflakes Data Marketplace grew 41% this quarter, now with more than 900 data sets from over 200 providers. We also saw more than 130% annual increase in so-called stable edges. Stable edges are ongoing Snowflake data networking relationships between providers and consumers. One of the feature datasets is FactSet's tick history data feed. It provides asset managers real-time data from over 200 exchanges. ZoomInfo is another feature dataset. It provides company and contact data with no additional integration or ETL required. The overarching backdrop for Snowflake is the inexorable march towards direct-to-consumer operations and full-blown digital transformation. Enterprises and institutions have grown acutely aware of how much they will end up relying on data operations, data analytics, and data science. Data is becoming the beating heart of the modern enterprise. So, the race is on to lay the foundation for a digital data-driven infrastructure. Snowflake is and will be a critical enabler of this journey. With that, I will now turn the call over to Mike.

Michael Scarpelli, CFO

Thank you, Frank. Q3 was a breakout consumption and bookings quarter for us. Our Q3 product revenues were $312 million, representing 110% year-over-year growth. Consumption continues to be led by our financial services, media, retail, and technology customers. Our outperformance is fueled by our existing customer base, which is demonstrated by our net revenue retention rate of 173%. Net revenue retention expansion is driven by rapid growth among our largest customers and the addition of six customers to the measurement cohort that have gained greater than $1 million of revenue in the past year. In Q3, five of our top 10 customers grew at or above the company's product revenue growth rate of 110% year-on-year. Q3 benefitted from record quarter-on-quarter incremental growth and we are pleased to see our largest customers continuing to expand their use of Snowflake. Q3 was also an impressive quarter of sales execution. Remaining performance obligations grew to $1.8 billion with our key industries leading net new bookings. We are also pleased with our progress to mature the sales motion to sell large multi-year deals. In the quarter, we signed a three-year $100 million deal to an existing customer, as well as five additional eight-figure multi-year deals. These commitments signal organizations' intent to expand their use of Snowflake, and we look forward to seeing their consumption follow. Of the $1.8 billion in RPO, we expect approximately 55% to be recognized as revenue in the next 12 months. We remain focused on penetrating the largest enterprises globally as we believe these organizations provide the largest opportunity for account expansion. In Q3, the number of customers with greater than $1 million in trailing 12-month product revenue increased to 148, up from 116 last quarter, including eight consuming more than $10 million. Q3 was also highlighted by meaningful strides in our partner ecosystem. First, our relationships with our cloud service providers in the field continued to strengthen. This fiscal year-to-date, we have co-sold over $0.5 billion in total contract value with our cloud service providers. Second, we are seeing significant growth from our Powered By Snowflake program, with the number of registered Powered By partners growing 137% quarter-on-quarter and the products revenue from those partners growing 173% year-on-year. Lastly, we are seeing growing engagement within the Data Cloud ecosystem, and we will continue to evaluate strategic opportunities to invest through Snowflake ventures. In the quarter, we announced strategic investments in Anaconda, Overlay Analytics, and Roadway. The third quarter also saw meaningful gains in profitability and efficiency. On a non-GAAP basis, our product gross margin was 74.6%. The scale, larger mix of compute consumption, and increased price per credit related to greater consumption of higher price product additions drove the outperformance. Operating margin was 2.5%, benefiting from revenue outperformance and a portion of planned Q3 headcount now starting in Q4. Our adjusted free cash flow margin was 6.4%, positively impacted by 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 and employee stock transactions. This quarter we saw a $12 million positive impact from those items. We maintained our strong cash position with approximately $5.1 billion in cash, cash equivalents, and short-term and long-term investments. Now, let's turn to our guidance and outlook. For the fourth quarter of fiscal 2022, we expect product revenues between $345 million and $350 million, representing year-over-year growth between 94% and 96%. Our forecast calls for our top customers to continue growing from Q3 to Q4, but not at the same record rate we saw from Q2 to Q3. Daily customer consumption patterns determine our revenue forecast. In many cases, consumption is driven by our customer's own business cycles and growth patterns. In Q4 of last year, some of our largest customers experienced tremendous business growth. With holiday travel returning to a more normal cadence, we also expect a greater impact on consumption in Q4 this year than last year. Turning to margins, we expect on a non-GAAP basis, a 1% operating margin and we expect 358 million diluted weighted average shares outstanding. As mentioned earlier, we push some hiring into Q4 but still expect to hire more than 1,200 employees in fiscal year 2022. For the full year fiscal 2022, we expect product revenues between $1.126 billion and $1.131 billion, representing year-over-year growth between 103% and 104%. Turning to profitability for the full year, we expect on a non-GAAP basis 74% product gross margin, negative 4% operating margin, and 8% adjusted free cash flow margin, and we expect 357 million diluted weighted average shares outstanding. For the remainder of the calendar year, we expect to remain in a predominantly remote work environment with limited travel. Our forecast reflects this plan. We're assuming an uptick of return to office expenses in the fourth quarter. While we anticipate an eventual return to the office, we do not have a specific timeline for that goal. With the Snowflake Ventures portfolio growing and strategic investments in privately held and publicly-traded securities, please keep in mind that we may see quarter-to-quarter fluctuations in our mark-to-market unrealized gains or losses going forward. We expect to recognize non-cash gains of approximately $20 million in the aggregate on prior strategic investments based on transactions that have closed so far in Q4. And lastly, we will host our Investor Day in person the week of June 13th, in conjunction with Snowflake Summit in Las Vegas. If you would like to attend, please email ir@snowflake.com. With that, operator, you can now open up the line for questions. And as a reminder, Christian Kleinerman, our SVP of Products will be joining us for Q&A.

Operator, Operator

Thank you. We have your first question from Raimo Lenschow with Barclays. Your line is open.

Raimo Lenschow, Analyst

I should unmute myself. Thank you. Congrats to me on this really strong quarter. A question for Frank. If I look at the data sharing progress you guys are making and also looking at some of the industry conferences that are happening this week, where data sharing starts to play a larger role. Where do you see we think we are on that journey in terms of other industries discovering the new world we are living in terms of sharing data in the cloud and what's possible and how different business models, different monetization models are possible, because it feels almost like we're only seeing the tip of the iceberg here. And then the question for Mike, the gross margin that you're talking about now, is that kind of the way to think about it because you've done a lot of the negotiations, or is there more room to look for in the coming years? Thank you.

Frank Slootman, CEO

Raimo, it's Frank. Generally, I agree with your assessment that we are just seeing the tip of the iceberg. Snowflake was built from the ground up as a data sharing platform, and we've been at it from the beginning. You see a lot of other players following our lead in this regard, but we are at the beginning. What happens a lot in our field in our business is that people look at modernizing legacy workloads. Those kinds of things often have priority over getting to data sharing, because we cannot even consider data sharing unless we get our data to the cloud, we start moving those workloads, we migrate our databases, and so on. So, yes, we are in the very early stages, but as you see from the metrics that we report on, there is a very, very steady aggressive growth happening quarter-on-quarter. But we sort of haven't reached that tipping point yet where sort of the floodgates are open and things are just expanding at a meteoric rate. But we're anticipating that that will happen at some point. It's very non-linear in the way the adoption is going to develop.

Michael Scarpelli, CFO

And Raimo, on your question on gross margins, I'm not providing guidance for next year or the longer term; we'll update that in June. All I will say is, we still have a number of deployments around the world that are not at scale, which presents upside for our margins from that, coupled with as we get into these larger customer relationships that are going with our higher edition product, they do attract higher margins. Consistent with what we said when we went public, I don't think this will ever get into the mid-80s like some of the other SaaS companies, but clearly, our longer-term guidance was 75% and there's upside to that.

Raimo Lenschow, Analyst

Perfect. Thank you. Congrats again.

Operator, Operator

We have your next question from Kirk Materne with Evercore ISI. Your line is open.

Kirk Materne, Analyst

Yes. Thanks very much and congrats on the quarter. Frank, actually I'm going to follow up a little bit on Raimo's question. Are there any industries where you're starting to see network effects take hold in terms of data sharing? I know you guys have taken a bit faster posture in terms of going more verticalizing your go-to-market. I was just kind of curious in areas like financial services, are you starting to see sort of network effects build based on getting some of those really key or core accounts? And then just for Mike, can you just give us an update on where you are from a hiring perspective as we head into next year, especially around sales capacity, things like that? Thanks.

Frank Slootman, CEO

Yes, Kirk, it's Frank. Yes, you definitely see network effects not so much by an enterprise, by institution, but really by industry because the industry and sub-industry, they really invoke a network effect because the entities have relationships and do business together. So, some of the data clouds that we announced during the quarter like the Financial Services Data Cloud and Media and Advertising, there's a huge amount of network effect in that area. Advertising, for a lot of reasons that people know, is under enormous pressure. There's this whole movement afoot to enrich data for advertising yield and effectiveness. And when we're trying to enrich data, that then triggers data sharing and data attribution type of strategy. So, it's very strong there. But there is a difference in between industries. Some industries are very leading edge, they are leaning in very, very hard. Now, others just take longer and you also see it by geography; it's different as well. Europe and Asia are running whatever 18, 24 months behind or so. But everybody's going to get there; just some are just more out front than others.

Michael Scarpelli, CFO

And Kirk, on your question regarding hiring, I want to start by saying we're all about quality rather than quantity of people, and so we're very selective. We are slightly behind, but we're more than making that up this quarter. And as I said in my prepared remarks, we do expect to hire net 1,200 people this year, and we're happy with the people we're hiring, but we will not sacrifice quality over quantity.

Kirk Materne, Analyst

Thank you all.

Operator, Operator

We have your next question from Derrick Wood with Cowen. Your line is open.

Derrick Wood, Analyst

Great. Thanks. Amazing quarter. I guess the first one for Mike. I mean, this kind of revenue outperformance is kind of above the parameters we've thought about, certainly above what we've seen in the past few quarters. What were the biggest outside drivers and what developments really led to this particular quarter having such strong upside?

Michael Scarpelli, CFO

What I would say is it was really driven by some of our largest mature customers with some things that were unique to their business that kind of surprised us on the upside. I don't think you're going to see that same repeat of a beat; at least I'm not expecting that. I'm sure you guys would love it, but I just don't see that happening this quarter. As we said before, a 5% to 7% beat is a big beat for us with our model. So, it was exceptional performance last quarter. I'm actually disappointed we outperformed that much, to be honest with you.

Derrick Wood, Analyst

Well, it's a good problem. Yes, well, that's good color. Maybe Frank, you called out this Media Data Cloud and how you're helping advertisers and marketers harness more first-party data is what I read in that release. And I guess, given all the developments going around IDFA and cracking down on third-party data, really the push to try to monetize first-party data, what kind of opportunity do you see and collecting and powering that first-party data in the media, entertainment, and other B2C industries?

Frank Slootman, CEO

It's having a significant impact across the entire economy. We need to consider the global shift towards direct-to-consumer models. Many industries, including those that have traditionally not engaged in direct-to-consumer sales, are embracing this approach. This shift drives substantial investments in data operations, data science, and creating data-driven businesses. To succeed, it's essential to implement highly refined strategies for data enrichment to optimize these relationships effectively. This is driving a significant emphasis on data sharing and the ability to enhance data with attributes from various sources. Therefore, owning and fully utilizing data as an organization will become increasingly crucial.

Derrick Wood, Analyst

Yes, very exciting. Okay, thanks.

Operator, Operator

We have your next question from Kash Rangan with Goldman Sachs. Your line is open.

Kash Rangan, Analyst

Thank you very much. It's been a remarkable quarter. Frank, I would like to hear your thoughts on your Fortune 500 customer base. You have 223 customers in total, with about 148 of them generating over a million dollars in product revenue. What is the overlap between these groups? Additionally, how much more potential do you see within the Fortune 500 space? I find it surprising that when you calculate the overall revenue of the company divided by the number of customers, the resulting figure is relatively low compared to where the company could expand its market share. Typically, broader enterprise software companies can generate up to a million dollars per account, which indicates that the current share of wallet is quite limited and leaves substantial opportunities ahead. Can you clarify the overlap between the million-dollar customers and your Fortune 500 base, as well as the potential you see with larger accounts? Thank you.

Frank Slootman, CEO

Yes, Kash, I agree with your statement. We have a presence but are only slightly penetrated, which is positive. This is exactly what we aim for. When we partner with a Fortune 500 customer or similar, it typically involves a lengthy process; it’s a journey and a relationship that develops. They have existing workloads and new projects, and this is something that evolves over time. You can clearly see this in our net revenue retention rates, as customers are actively learning and growing along the way. They might not have a precise plan for what they'll do and when, but they are definitely exploring and learning as they progress. Additionally, we shouldn't assume that all revenue will come from Fortune 500 companies; this is definitely not the case. You would be surprised at the number of customers we have that are not Fortune 500 companies and how significant their revenue contribution is. These are newer enterprises that are born in the cloud and are focused on digital, direct-to-consumer approaches, which leads to a very different culture and orientation towards data. They will play a prominent role in our business mix; while Fortune 500 companies are still important, their adoption as traditional enterprises tends to lag behind the newer entities we are engaging with.

Kash Rangan, Analyst

Thank you so much. One follow-up for you, Mike, quickly as a result of the profitability inflection we're seeing in the business, does that make you more confident and maybe potentially think about raising the long-term cash flow margin goal that you outlined a few months back? Thank you so much.

Michael Scarpelli, CFO

We will be updating our long-term guidance at our Investor Day. I clearly do think there is upside to both our operating margin and free cash flow margin and we will update it at that time.

Kash Rangan, Analyst

Splendid. Thank you so much.

Operator, Operator

We have your next question from DJ Hynes with Canaccord Genuity. Your line is open.

David Hynes, Analyst

Hey, thanks guys and yes, congrats on the results, really impressive. Again, the standout to me is the net revenue retention. So, Frank, I guess the question is as you think about driving growth in the phase, where does the discovery of new use cases typically come from? Is it mostly customer-led? How much can sales influence that expansion process? And I guess, longer term, do you think you have to build out a customer success layer over time? I would love to just get your thoughts as you think about how this evolves over time?

Frank Slootman, CEO

First off, the entire company is focused on customer success. This is not limited to a specific department or function. There are predictable patterns in how things unfold, but they vary based on the types of enterprises we engage with. Historically, we have dealt with legacy and on-premise workloads, following a reliable process for moving data to the cloud and migrating databases. This has been a foundational aspect of our business. However, the importance of verticalization is evident as it primarily relates to preparing companies for their digital direct-to-consumer futures. In this context, they aim to effectively manage data, generate revenue from it, and make data central to their operations. And that is not just limited to the enterprises you commonly think of; even in retail, traditionally brick-and-mortar businesses are becoming highly focused on their data, understanding its value, and figuring out how to monetize it. These significant developments are prompting everyone to realize they possess something extremely valuable if they can enhance and utilize it effectively. Demand is emerging from various sources; over the past year, sales organizations have been redirected to truly grasp the customer's context—understanding their challenges, actions, and approaches. This enables us to deliver value to our customers. It’s no longer merely about comparing our architecture with competitors and benchmarking workloads. Historically, that’s what Snowflake did, but now we are fully invested in our customers' context, their issues, and challenges. We are becoming experts in their businesses, marking a significant evolution. It's exciting because it also enhances our position within enterprises. We are no longer only engaging with IT professionals and CIOs; we are now also connecting with the business side of IT, leading to a very different conversation.

David Hynes, Analyst

Yes, that makes sense. It's helpful color. And then Mike, as a follow-up, so you made some comments with respect to how you're thinking about Q4 consumption patterns. And it made me think about complexities and forecasting a business like this. So, I guess the question really is, do you find that it's getting easier or harder to model the business as it scales? I mean I feel like, on the one hand, you probably benefit from customer diversity and additional data points around usage patterns. But on the other, you're constantly trying to figure out kind of the patterns of new customers. So, clearly, some puts and takes there. I would just love to get your thoughts.

Michael Scarpelli, CFO

I think it's improving and I'm quite satisfied. The Q3 performance compared to our internal forecast is linked to a few very large customers. Aside from that, we have been largely accurate with what we predicted for customer consumption at the start of the year. I’m happy with that, and it becomes easier as our customer base grows larger. Additionally, we utilize Snowflake for our modeling.

David Hynes, Analyst

There you go. Proof is in the pudding. Thank you guys.

Operator, Operator

We have your next question from Mark Murphy with JPMorgan. Your line is open.

Mark Murphy, Analyst

Thank you very much, and I’d like to express my congratulations on a fantastic quarter. Frank, I remember when the pandemic began about a year and a half ago, we actually observed quite healthy consumption trends because companies needed to analyze data to respond to the environment. I'm curious if there are any similar developments currently driving increased consumption, particularly in Q3. For example, could frozen global supply chains be influencing retailer activity, or is the new variant in pharmaceuticals, inflation, and interest rate volatility impacting Financial Services?

Michael Scarpelli, CFO

When I look at the outperformance across our company, the outperformance is really being driven by a number of large customers whose businesses are growing dramatically, plus a couple of our Fortune 500 customers that are doing some specific things, is really what's driving it. So, I can't say it has anything to do with the pandemic, supply chain, pharma looking at things based upon the customers that I see that had a really large outperformance. That doesn't mean there's not any of that in our customer base, but I just don't see that as the biggest drivers of our outperformance.

Mark Murphy, Analyst

Okay. Then Mike, as a quick follow-up, when we look at the sequential change in RPO, it's quite a bit larger in Q3 than in Q2. And I was wondering if you could shed any light on that? To what extent is it driven by duration versus the booking itself, which I think you've very clearly mentioned?

Michael Scarpelli, CFO

Well, if you recall at the end of last quarter, a lot of people picked on our RPO and I said, don't worry, it's timing and Q3 was going to have a big quarter of RPO, which we pretty much hit our targets internally as to where we thought it would be. There is timing, as an example, our first $100 million deal we did in 2020, clearly, that customer is not renewing every year because it's in RPO. We will do some big deals this quarter too, we expect Q4 is going to be a big RPO addition. But at the end of the day, it's about RPO in isolation, it's revenue and it's more current RPO that is more meaningful.

Mark Murphy, Analyst

Got it. Thank you very much.

Michael Scarpelli, CFO

And give you that 55% we estimate will be recognized over the next 12 months.

Operator, Operator

We have your next question from Greg Moskowitz with Mizuho. Your line is open.

Greg Moskowitz, Analyst

All right. Thank you. Congrats on a terrific quarter. So, we've been hearing more customer anecdotes to the tune of as these companies are growing, they're becoming less confident that other solutions they may be using for data warehousing, et cetera, can handle their future data volumes and performance needs. And that in turn is driving more business to the Snowflake platform. Is that consistent Frank with what you're seeing?

Frank Slootman, CEO

We'll say yes.

Greg Moskowitz, Analyst

All right, that's short and sweet. And then just as a follow-up, so I wanted to ask about international because the revenue growth that you reported this quarter was pretty stunning. Clearly, that was a primary driver of the product revenue acceleration you showed this quarter. The question here is, are you seeing signs of an inflection in consumption overseas? Or was this more driven by consumption from a few of those larger customers that surprised you this quarter?

Michael Scarpelli, CFO

What I would say first of all, is we saw real outperformance relative to plan in bookings in Asia and EMEA. We also had a very, very strong North America, but off a much higher plan. Yes, in our top 10, we have one European customer that is our largest and is growing very, very fast. But still, the majority of our growth in revenue is coming from our North American customers. But we do see next year and beyond EMEA, in particular, and Asia starting to derive some of that as well too.

Greg Moskowitz, Analyst

That's helpful. Thank you.

Operator, Operator

We have your next question from Brad Zelnick with Deutsche Bank. Your line is open.

Brad Zelnick, Analyst

Thank you all for a fantastic quarter and impressive results, even if Mike is a bit disappointed. Mike, you mentioned around half a billion booked with our CSP partners. I wanted to know how the go-to-market strategy has evolved with these partners. Specifically, when customers use pre-purchased cloud credits through the CSPs, does that impact your RPO, and should we consider that as a factor?

Michael Scarpelli, CFO

First of all, I think things are going well with some of the Cloud Service Providers. To date, we have co-sold over half a billion, with AWS making up the majority, followed by Microsoft. Google has had virtually no contribution to that co-selling. However, we are still seeing a steady increase in the number of customers on Google Cloud Platform. Sorry, Brad, what was the other part of your question?

Brad Zelnick, Analyst

It was just if customers consume pre-purchased cloud credits...

Michael Scarpelli, CFO

Yes, so some customers choose to go through the marketplace, while others choose to go direct. They generally choose to go to the marketplace so they can draw down their commits with the cloud provider; that would still show up in RPO because we still get the contract from the customer. We just do the invoicing and everything through the marketplace for them.

Brad Zelnick, Analyst

Got it, that's helpful. And maybe just a quick follow-up perhaps for Christian. I just look back historically and price performance has always been a key purchasing criteria in the database market. And I feel like Snowflake has done a phenomenal job elevating the discussion to a much higher plane. But I noticed off-late, there have been some competitive claims regarding performance. I'm just curious if A, how much of a priority or criteria is this across your typical sales cycle? And B, what if anything should we know about TPC benchmarks and Snowflake's competitiveness from a performance perspective?

Christian Kleinerman, SVP of Product

So hi, Brad, Christian here. I think that at all points in time in Snowflake, we're investing in performance. Every part of the system is getting faster and lower latency. But we're always looking at is the price performance of customer workloads. Many of us at Snowflake have been in the industry long enough to know that the TPC benchmarks end up being again with synthetic evaluations that very quickly get diverse from customer benefits. And at Snowflake, we're 100% focused on price performance for our customers, but it's not just price performance; it’s everything else, it's the collaboration and the data sharing that was mentioned, as well as the data governance. That's how we think about the broader Data Cloud.

Brad Zelnick, Analyst

Excellent. Thanks so much, guys, and congrats.

Operator, Operator

We have your next question from Kamil Mielczarek with William Blair. Your line is open.

Kamil Mielczarek, Analyst

Hi everyone. Congratulations on another impressive quarter and thank you for taking my question. I have a follow-up regarding your comments about Fortune 500 customers. You currently serve nearly half of them, but only about 15% are generating $1 million or more in revenue. Is it reasonable to expect that most of them will reach and surpass that $1 million threshold in the coming years? Additionally, you mentioned that it takes about nine months for customers to achieve the contractually targeted revenue. For those generating $1 million, how long does it typically take for them to progress from contract signing to reaching that amount? Given that you're acquiring larger customers now, do you anticipate that this timeframe will decrease in the future?

Michael Scarpelli, CFO

Well, it depends on the customer. Most customers don't sign a million-dollar capacity deal; they typically sign for about $50,000 when they first come on board. So, it clearly takes some time. Yes, we have signed some large customers, but on average, that's not the case. When we presented our model at our Analyst Day last year, we projected that we could get our customers to pay us over a million dollars a year, which would average out to $5.5 million. Currently, with 148 customers, the average is $3.5 million. Clearly, the fact that we have 223 Fortune 500; those are only on average right now doing $1.250 million. There's a lot of upside in those numbers because it takes time to ramp these guys. And those have been added in the last couple of years and it will take time.

Kamil Mielczarek, Analyst

That's great color. Thank you. And just as a quick follow-up, it's nice to see the positive operating income. We've talked in the past about Snowflake being in growth mode. So, given now you're broken even, can you update us on how you're thinking about balancing margin expansion versus reinvesting in the business and specifically your headcount growth is roughly in line with last year? Can we see that accelerate if your margin starts to expand faster than expected?

Michael Scarpelli, CFO

So, we laid out our long-term model at our Analyst Day last year. We will update that again in June. But I will reiterate again, we are a growth company, but it's not growth at all cost. We will only spend money if we think it makes sense. And as I said before, we are hiring what we think is the right pace to get quality people in the door.

Kamil Mielczarek, Analyst

Great. Thanks again.

Operator, Operator

We have your next question from Brent Bracelin with Piper Sandler. Your line is open.

Brent Bracelin, Analyst

Good afternoon. I guess I'm going to stick with the thread of accelerating product growth; rarely do we see companies at this scale delivering accelerating growth. I know you called out large customers, called out a couple of special projects within the Fortune 500. But as you just think about the composition of consumption in the quarter and the acceleration outside of those things, do you think the business could have accelerated even at and maintain triple-digit growth even without those anomalies this quarter, just trying to double click around the acceleration you saw on the product side?

Michael Scarpelli, CFO

Our strong performance is partly due to the contributions from our large customers. Generally, most of our customers have been surpassing their targets. While some are experiencing declines, which is typical every quarter, many more are exceeding their projections. It's difficult to quantify precisely, but I believe that even if we consider a few of those significant customers and their growth, we would still have achieved over 100% growth.

Brent Bracelin, Analyst

Perfect, very clear. And then just you mentioned product add-ons as one of the contributing factors to improving product gross margins this quarter. Can you maybe give a little color on what one or two of the more popular product add-ons that are kind of returning?

Michael Scarpelli, CFO

We have one primary product, which is the standard enterprise Business Critical. While we also offer a virtual private Snowflake, it has fewer users since many customers prefer the security of Business Critical. Our larger customers tend to use the enterprise or Business Critical options, which contribute more to our margins and include additional features.

Brent Bracelin, Analyst

Got it, very clear. Thank you.

Operator, Operator

We have your next question from Tyler Radke with Citi. Your line is open.

Tyler Radke, Analyst

Yes, hi, thanks for taking my question. Just wanted to go back to the outperformance that you saw with these two customers, just wanted to clarify, Mike, was it something that was kind of one-time in nature or was this just projects that it happened a lot faster? And so the new run rate is faster, and you're just not expecting that type of dynamic to play out going forward?

Michael Scarpelli, CFO

One of our customers typically undertakes a significant project each year during this time, which appears to have increased their consumption. The other customers are likely to continue growing their usage, but not at the same pace. This slowdown is partly due to more employees taking vacations, especially noted during the Thanksgiving holiday, which affects their business operations and usage of Snowflake. We anticipate similar patterns during Christmas and New Year's as many will also be on vacation, leading to fluctuations in our customers' consumption on those days. This quarter holds the highest holiday activity compared to any other quarter.

Tyler Radke, Analyst

Yes, helpful. And maybe this one's for Frank. I mean, clearly the results are really strong, nothing to really pick out. I think when you talked about some of the verticals, you called out Media, Tech, Retail, that that were particularly strong. If you think about maybe the verticals that were less strong, like what's the biggest thing holding folks back? Is it budget, is it just kind of internal process change, hiring environment, just give us a sense on the customer constraints in verticals that are maybe not as strong?

Frank Slootman, CEO

Well, I mean there are verticals like, for example, I mean, we've talked about this on previous calls, the contribution they're getting from the public sector is not where we think it will eventually be under real structural reasons. Why that is so and we're solving for those issues, and that business will come along. But, there is a lot of friction. I mean we're dealing with infrastructure that has existed for a very long period of time, completely grafted into operational processes; you don't just unplug that stuff and plug something new, and then you're off to the races, right? These are generational shifts and transitions that enterprises are taking. So, it's not like throwing the switch. These are very, very carefully orchestrated transitions over a long period of time, takes a lot of resources, takes a lot of people. And then once they sort of get to the other side, yes, then you see the acceleration happening. We see that over and over again, that once they are re-platformed, then all of a sudden, because of the nature of the Snowflake platform itself, sky's the limit because the platform is so accommodating of so many different workloads, and it just works.

Tyler Radke, Analyst

Thank you.

Operator, Operator

We have your next question from Keith Weiss with Morgan Stanley. Your line is open.

Keith Weiss, Analyst

Excellent. Thank you guys for taking the question. I think this one is for Mike, but when I'm looking at your guys' results, I mean, you guys have been doing really well for an extended period of time and this quarter was pretty remarkable. But it seems like in the last two quarters, you've seen, if anything, like an upward inflection in terms of the dollar-based net expansion rate improving and like your willingness to kind of bring up the sort of out-quarter guides and sort of like it's more of a big raise cadence now than it was in the initial quarters out of the gate. Is there something that changed two quarters ago that gave you guys more visibility or more confidence in the business or that inflected in the business that explains what we're kind of seeing in the numbers here?

Michael Scarpelli, CFO

I think it's a couple things. One, we talked about that when Frank came on board pre-going public, we really shifted to going after some of the largest companies in the world, not that we weren't going after them before. But I would say we more aggressively aligned our sales force. And it takes a number of years to ramp those customers and we're seeing a lot of these companies starting to mature right now. Two, a lot of the things we've been doing with new product features like Snowpark and the Powered By program, we're seeing the benefits of that taking place. And not to mention the network effect with data sharing and other things that we're starting to see then stable edges. It's kind of starting to come to fruition. Sorry?

Frank Slootman, CEO

Verticalization.

Michael Scarpelli, CFO

Verticalization is the other one too. That whole media cloud, that is a huge thing for us, not to mention, Financial Services cloud, and I think we're getting much better at our salespeople selling the business value into those verticals.

Keith Weiss, Analyst

Got it. I have a follow-up question. If there are concerns from investors regarding Snowflake, which are not widespread but related to consumption models, the expenses can accumulate rapidly. Some customers experience significant growth quickly, but we have observed cases where customers feel overwhelmed by costs over time, leading to negative perceptions and challenges for companies to manage. How do you prevent this? How do you ensure your customers perceive value from the solution without facing unexpected costs that the consumption model might lead to, such as realizing they are using significantly more than anticipated?

Frank Slootman, CEO

This is Frank. One of the great things about running a consumption model is that we charge back who is spending the compute, which business units. So, business units can decide where they want to run this workload, how often they want to run it, how they want to provision it. So, they're really in charge. It's not sort of a runaway utility model; people can selectively decide which workloads they want to run and what is the business case for it, and that's the way it's supposed to work. That really mitigates the sticker shock; people can make investment decisions as they go along and as it warms it. We're seeing this with some of our large banking customers as they went from recomputing loan rates on a monthly basis to doing it every night.

Michael Scarpelli, CFO

Does it cost money? Yes, it does. In other words, initially, people experience sticker shock because the costs can increase significantly. We are redefining what is considered normal and appropriate spending for this type of computing. This is quite different from historical trends due to our current capabilities and the need for direct-to-consumer strategies and complete digital transformation. While you can choose to remain inactive, I would not advise that.

Christian Kleinerman, SVP of Product

Let me add a quick comment also on the topic of performance, we are very intentional that each time that we make the system faster, we're improving also the economics of Snowflake. And we hear very consistently from our customers that those are very welcome surprises where the economics of the platform are getting better without them having to do any upgrades or changes to the platform.

Keith Weiss, Analyst

Got it, that's super helpful guys. Congratulations on an awesome quarter.

Operator, Operator

We have your next question from Gray Powell with BTIG. Your line is open.

Janet Zhang, Analyst

Hi, this is Janet Zhang on for Gray Powell. Congrats on the quarter and thanks for taking the question. So, I was wondering what do you think is the best forward-looking predictor of revenue? I know, last quarter, there was a focus on RPO, which can move around. So, how much weight do you think we should put on things like RPO or customer ads versus just the pace of net new product revenue in a given quarter?

Michael Scarpelli, CFO

I would say the first thing is the guidance we give. The second thing is historical revenue growth patterns coupled with the current portion of RPO to build your models.

Janet Zhang, Analyst

Got it. That makes sense. Thank you so much.

Operator, Operator

We have your next question from Karl Keirstead with UBS. Your line is open.

Karl Keirstead, Analyst

Great. Maybe I'll direct this one to Christian. The Data Science-ML workload opportunity seems to be huge and I think everybody on this call took notice of your Data Science-related announcements at your recent Snow Day. I just wanted to ask you how ambitious Snowflake is about going after those workloads and how willing are you to go up against the likes of Databricks, DataRobot, DataIQ and others? Or do you view them more as partners? Thank you.

Christian Kleinerman, SVP of Product

Yes, hi, Karl. The way we think about it is we want to help our customers bring the computation to do Data Science and machine learning on to Snowflake so that they don't have to copy the data out and miss out on the benefits of data governance, et cetera. As such, the big investments we've done have been all around extensibility. That's where you see Snowpark; you see Python. And we're partnering with all the companies that you mentioned for them to drive consumption and compete on Snowflake. So, what we want is to have those solutions come and run natively on Snowflake.

Karl Keirstead, Analyst

Okay, got it. Good luck chasing that opportunity. It seems material.

Operator, Operator

We have your last question from Brent Thill with Jefferies. Your line is open.

Brent Thill, Analyst

Frank, look forward to the book. When you think about unstructured data, I know you made an announcement to push harder here. Can you talk to us about what you're seeing from customers' interest level and are you starting to see customers go in production? Or is that a 2022 event? Thanks.

Frank Slootman, CEO

Thanks for the plug on the book there, Brent. I'm going to ask Christian to address this question.

Christian Kleinerman, SVP of Product

Yes, so unstructured data went into public preview at our Snow Day. We are seeing quite a bit of adoption. We're seeing images, documents, even speech recordings getting stored into Snowflake. And we're seeing customers start to leverage Snowpark to do programming in Java to get value out of those files. So, it's looking pretty good from the early adoption, the few weeks that it has been in public review.

Brent Thill, Analyst

And Mike, you mentioned Media and Financial Services as it relates to verticals; if you had kind of the next two verticals on ready, reserved, ready to take off, what would you say those are sitting on the tarmac ready to roll into 2022 if you had up in commercial?

Michael Scarpelli, CFO

I think healthcare is going to be a big one. I think in the longer term, I do think public sector will be a big vertical we're working on. And retail is a very, very big vertical for us that will take off. Listen, we're doing well across the board. We're just really highlighting. We're doing exceptionally well in Media and Financial Services.

Brent Thill, Analyst

Got it. Thank you.

Operator, Operator

We're I'm showing no further questions at this time. Presenters, please continue.

Frank Slootman, CEO

Thanks everyone.

Operator, Operator

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