Snowflake (NYSE:SNOW) Q2: Strong Sales, Gross Margin Improves

Full Report / August 25, 2021
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Data warehouse-as-a-service Snowflake (NYSE:SNOW) reported Q2 FY2022 results beating Wall St's expectations, with revenue up 104% year on year to $272.1 million. Snowflake made a GAAP loss of $189.7 million, down on its loss of $77.6 million, in the same quarter last year.

Snowflake (SNOW) Q2 FY2022 Highlights:

  • Revenue: $272.1 million vs analyst estimates of $256.7 million (6.01% beat)
  • EPS (GAAP): -$0.64
  • Product revenue guidance for Q3 2022 is $282.5 million at the midpoint
  • Free cash flow was negative -$11.96 million, down from positive free cash flow of $12.9 million in previous quarter
  • Net Revenue Retention Rate: 169%, in line with previous quarter
  • Customers: 4,990, up from 4,532 in previous quarter
  • Gross Margin (GAAP): 61%, up from 57.4% previous quarter

Founded in 2013 by three French engineers who spent decades working for Oracle, Snowflake 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.

The amount of data created in the world is growing at an accelerating pace and hand and hand is growing the importance of understanding it, as the pressures on business efficiency and understanding customer preferences mount. Businesses world wide are moving away from on-premise, fixed cost systems to cloud based solutions that offer them flexibility, and that in effect drives the demand for cloud based data warehouse solutions.

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 year, growing from quarterly revenue of $133.1 million, to $272.1 million.

Snowflake Total Revenue

This was another standout quarter with the revenue up a splendid 104% year on year. On top of that, revenue increased $43.2 million quarter on quarter, a solid improvement on the $38.4 million increase in Q1 2022, and happily, a slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 69.6% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Snowflake reported 4,990 customers at the end of the quarter, an increase of 458 on last quarter. That is quite a bit better customer growth than last quarter and in line with what we have seen in previous quarters, demonstrating the company has the sales momentum required to drive continued growth. We've no doubt shareholders will take this as an indication that the company's go-to-market strategy is running smoothly.

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 169% in Q2. That means even if they didn't win any new customers, Snowflake would have grown its revenue 69% year on year. Trending up over the last year, this is 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.


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, licences, technical support and other necessary running expenses was at 61% in Q2.

Snowflake Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.61 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 Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Snowflake’s balance sheet, but we note that with a market capitalization of $83.3 billion and more than $4.13 billion in cash, the company has the capacity to continue to prioritise growth over profitability.

We were impressed by the exceptional revenue growth Snowflake delivered this quarter. And we were also glad to see the improvement in gross margin. Zooming out, we think this was a fantastic quarter that should have shareholders cheering. The company is up 4.77% on the results and currently trades at $297.06 per share.

Is Now The Time?

Snowflake may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. 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 efficient customer acquisition is better than many similar companies.

Snowflake's price to sales ratio based on the next twelve months of 59.2x 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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