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Snowflake (NYSE:SNOW) Q3: Beats On Revenue, Stock Soars


Full Report / November 29, 2023

Data warehouse-as-a-service Snowflake (NYSE:SNOW) announced better-than-expected results in Q3 FY2024, with revenue up 31.8% year on year to $734.2 million. It made a GAAP loss of $0.65 per share, down from its loss of $0.63 per share in the same quarter last year.

Snowflake (SNOW) Q3 FY2024 Highlights:

  • Revenue: $734.2 million vs analyst estimates of $713.5 million (2.9% beat)
  • RPO (remaining performance obligations, a leading indicator of revenue) of $3.7 billion (23% year on year growth) a slight miss
  • EPS (non-GAAP): $0.25 vs analyst estimates of $0.16 ($0.09 beat)
  • Product Revenue Guidance for Q4 2024 is $718.5 million at the midpoint (beat vs. expectations of $702.5 million)
  • Free Cash Flow of $102.3 million, up 48.2% from the previous quarter
  • Net Revenue Retention Rate: 135%, down from 142% in the previous quarter (beat vs. expectations of 133%)
  • Gross Margin (GAAP): 68.8%, up from 65.8% in the 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 Storage

Data is the lifeblood of the internet and software in general, and the amount of data created is accelerating. As a result, the importance of storing the data in scalable and efficient formats continues to rise, especially as its diversity and associated use cases expand from analyzing simple, structured datasets to high-scale processing of unstructured data such as 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 exceptional over the last two years, growing from $334.4 million in Q3 FY2022 to $734.2 million this quarter.

Snowflake Total Revenue

Unsurprisingly, this was another great quarter for Snowflake with revenue up 31.8% year on year. On top of that, its revenue increased $60.16 million quarter on quarter, a solid improvement from the $50.42 million increase in Q2 2024. This is a sign of slight re-acceleration of growth.

Looking ahead, analysts covering the company were expecting sales to grow 27.3% over the next 12 months before the earnings results announcement.

Large Customers Growth

This quarter, Snowflake reported 436 enterprise customers paying more than $1m annually, an increase of 34 from the previous quarter. That's quite a bit more contract wins than last quarter and quite a bit above what we've typically observed in past quarters, demonstrating that the business has good sales momentum. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is working very well.

Snowflake customers paying more than $1m annually

Product Success

One of the best parts about the software-as-a-service business model (and a reason why SaaS companies trade at such high valuation multiples) is that customers typically spend more on a company's products and services over time.

Snowflake Net Revenue Retention Rate

Snowflake's net revenue retention rate, a key performance metric measuring how much money existing customers from a year ago are spending today, was 135% in Q3. This means that even if Snowflake didn't win any new customers over the last 12 months, it would've grown its revenue by 35%.

Despite falling over the last year, Snowflake still has an excellent net retention rate. This data point proves that the company sells useful products, and we can see that its customers are satisfied and increasing usage over time.

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's left after paying for servers, licenses, technical support, and other necessary running expenses, was 68.8% in Q3.

Snowflake Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, sales and marketing, and general administrative overhead. While its gross margin has improved significantly since the previous quarter, Snowflake's gross margin is still poor for a SaaS business. It's vital that the company continues to improve this key metric.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Snowflake's free cash flow came in at $102.3 million in Q3, up 57.4% year on year.

Snowflake Free Cash Flow

Snowflake has generated $659.7 million in free cash flow over the last 12 months, an impressive 26.1% of revenue. This high FCF margin stems from its asset-lite business model and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a cash cushion.

Key Takeaways from Snowflake's Q3 Results

With a market capitalization of $56.56 billion, a $3.55 billion cash balance, and positive free cash flow over the last 12 months, we're confident that Snowflake has the resources needed to pursue a high-growth business strategy.

This was a beat and raise quarter that is always welcome by shareholders. Specifically, it was good to see Snowflake beat analysts' revenue expectations this quarter due to beats on both total customers as well as net revenue retention rate. We were also glad its gross margin improved and its non-GAAP operating profit outperformed expectations by a healthy margin. To add to the positives, Q4 guidance for product revenue was higher than Wall Street estimates, and the company raised its full year guidance for product revenue, gross and operating profit, and free cash flow. Overall, this was a very good quarter for Snowflake. The stock is up 6.6% after reporting and currently trades at $186.85 per share.

Is Now The Time?

When considering an investment in Snowflake, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Snowflake is a great business. While we'd 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 they love the product. On top of that, its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Snowflake's price to sales ratio based on the next 12 months of 17.3x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Snowflake's qualities stand out and we still like it at this price.

Wall Street analysts covering the company had a one-year price target of $198.3 per share right before these results, implying that they saw upside in buying Snowflake even in the short term.

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