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Snowflake (NYSE:SNOW) Surprises With Q3 Sales But Stock Drops 11.9%


Full Report / November 30, 2022
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Data warehouse-as-a-service Snowflake (NYSE:SNOW) beat analyst expectations in Q3 FY2023 quarter, with revenue up 66.5% year on year to $557 million. Snowflake made a GAAP loss of $200.9 million, down on its loss of $154.8 million, in the same quarter last year.

Snowflake (SNOW) Q3 FY2023 Highlights:

  • Revenue: $557 million vs analyst estimates of $538.9 million (3.36% beat)
  • EPS (non-GAAP): $0.11 vs analyst estimates of $0.05 ($0.06 beat)
  • Product revenue guidance for Q4 2023 is $537.5 million at the midpoint
  • Free cash flow of $64.9 million, up 20.6% from previous quarter
  • Net Revenue Retention Rate: 165%, down from 171% previous quarter
  • Customers: 7,292, up from 6,808 in previous quarter
  • Gross Margin (GAAP): 65.7%, up from 63.8% same quarter last year

Founded in 2013 by three French engineers who spent decades working for Oracle, Snowflake (NYSE:SNOW) provides a data warehouse-as-a-service in the cloud that allows companies to store large amounts of data and analyze it in real time.

The amount of data generated and collected by companies has exploded and so has the need to analyze it, but it is still often stored in incompatible formats, spread across many different types of storages, and with increasing complexity, slow to analyze. Traditional on-premise data warehouses turned out to be quite inefficient, requiring large computing power to deal with the peak demand which not only laid idle large blocks of time, but actually still struggled when a number of requests arrived at the same time.

Snowflake’s cloud platform separates the storage and analysis making it significantly faster, cheaper and easier for their customers to answer data questions, often replacing a number of different systems at once.

Data is the lifeblood of the internet and software in general, and the amount of data created is growing at an accelerating pace. Likewise, the importance of storing the data in scalable and efficient formats continues to rise, especially as the diversity of the data and associated use cases expand from analyzing simple, structured data to high-scale processing of unstructured data, images, audio and video.

Snowflake’s cloud innovation has played a significant role in its market visibility given the level of competition in a market that includes Teradata (NYSE:TDC), Cloudera (NYSE:CLDR), and cloud service providers such as Microsoft (NASDAQ:MSFT), Google, and Amazon (NASDAQ:AMZN).

Sales Growth

As you can see below, Snowflake's revenue growth has been incredible over the last two years, growing from quarterly revenue of $159.6 million in Q3 FY2021, to $557 million.

Snowflake Total Revenue

And while we saw even higher rates of growth previously, the revenue growth was still very strong; up a rather splendid 66.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $59.7 million in Q3, compared to $74.8 million in Q2 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 48.9% over the next twelve months.

Customer Growth

You can see below that Snowflake reported 7,292 customers at the end of the quarter, an increase of 484 on last quarter. That's in line with the customer growth we have seen over the last couple of quarters, suggesting that the company can maintain its current sales momentum.

Snowflake Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Snowflake Net Revenue Retention Rate

Snowflake's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 165% in Q3. That means even if they didn't win any new customers, Snowflake would have grown its revenue 65% year on year. Despite the recent drop that is still an absolutely exceptional retention rate, meaning Snowflake's software is extremely successful with their customers who are rapidly expanding the use of it across their organizations.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Snowflake's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 65.7% in Q3.

Snowflake Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.65 left to spend on developing new products, marketing & sales and the general administrative overhead. This would be considered a low gross margin for a SaaS company and we would like to see it start improving.

Cash Is King

If you have followed StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Snowflake's free cash flow came in at $64.9 million in Q3, up 586% year on year.

Snowflake Free Cash Flow

Snowflake has generated $361.9 million in free cash flow over the last twelve months, an impressive 19.4% of revenues. This extremely high FCF margin is a result of Snowflake asset lite business model and strong competitive positioning, and provides it the option to return capital to shareholders while still having plenty of cash to invest in the business.

Key Takeaways from Snowflake's Q3 Results

Sporting a market capitalization of $43.6 billion, more than $3.94 billion in cash and with positive free cash flow over the last twelve months, we're confident that Snowflake has the resources it needs to pursue a high growth business strategy.

We were impressed by strong free cash flow Snowflake delivered this quarter. And we were also excited to see that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the deterioration in revenue retention rate. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. But the market was likely expecting more and the company is down 11.9% on the results and currently trades at $125.79 per share.

Is Now The Time?

When considering Snowflake, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There are a number of reasons why we think Snowflake is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its customers are increasing their spending quite quickly, suggesting that they love the product, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Snowflake's price to sales ratio based on the next twelve months of 16.5x indicates that the market is definitely optimistic about its growth prospects. Looking at the tech landscape today, Snowflake's qualities stand out and there's no doubt that it is a bit of a market darling. We'd argue that its often wise to hold on to quality businesses long term, but we do want to mention that there seems to be a lot optimism priced in at the moment.

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