Data warehouse-as-a-service Snowflake (NYSE:SNOW) beat analyst expectations in Q1 FY2024 quarter, with revenue up 47.6% year on year to $623.6 million. Snowflake made a GAAP loss of $226.1 million, down on its loss of $165.8 million, in the same quarter last year.
Snowflake (SNOW) Q1 FY2024 Highlights:
- Revenue: $623.6 million vs analyst estimates of $608.7 million (2.45% beat)
- EPS (non-GAAP): $0.15 vs analyst estimates of $0.05 ($0.10 beat)
- Product revenue guidance for Q2 2024 is $622.5 million at the midpoint
- Net Revenue Retention Rate: 151%, down from 158% previous quarter
- Gross Margin (GAAP): 66.4%, up from 65% 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 $228.9 million in Q1 FY2022, to $623.6 million.
And unsurprisingly, this was another great quarter for Snowflake with revenue up 47.6% year on year. On top of that, revenue increased $34.6 million quarter on quarter, a solid improvement on the $32 million increase in Q4 2023, and even a sign of slight acceleration of growth.
Ahead of the earnings results the analysts covering the company were estimating sales to grow 37.4% over the next twelve months.
Large Customers Growth
You can see below that at the end of the quarter Snowflake reported 373 enterprise customers paying more than $1m annually, an increase of 43 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.
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'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 151% in Q1. That means even if they didn't win any new customers, Snowflake would have grown its revenue 51% year on year. Despite it going down over the last year 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 66.4% in Q1.
That means that for every $1 in revenue the company had $0.66 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Key Takeaways from Snowflake's Q1 Results
With a market capitalization of $56.9 billion, more than $3.95 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
It was good to see Snowflake beat revenue expectations and improve their gross margin this quarter. On the other hand, it was less good to see the deterioration in revenue retention rate. A large negative was guidance. Both next quarter and full year guidance for product revenue and operating income margin missed expectations. Overall, it seems to us that this was a complicated quarter for Snowflake with negative outlook. The company is down 12.8% on the results and currently trades at $154.35 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. We think Snowflake is a solid business. We would expect growth rates to moderate from here, but 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 strong free cash flow generation gives it re-investment options.
Snowflake's price to sales ratio based on the next twelve months of 18.4x indicates that the market is certainly optimistic about its growth prospects. There are definitely things to like about Snowflake and there's no doubt it is a bit of a market darling, at least for some. But when considering the company against the backdrop of the tech stock landscape, it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.
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