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Snowflake (NYSE:SNOW) Posts Better-Than-Expected Sales In Q4 But Stock Drops 28.5%


Full Report / March 02, 2022
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Data warehouse-as-a-service Snowflake (NYSE:SNOW) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 101% year on year to $383.7 million. Snowflake made a GAAP loss of $132.1 million, improving on its loss of $198.9 million, in the same quarter last year.

Snowflake (SNOW) Q4 FY2022 Highlights:

  • Revenue: $383.7 million vs analyst estimates of $372.8 million (2.92% beat)
  • EPS (GAAP): -$0.43
  • Product revenue guidance for Q1 2023 is $385.5 million at the midpoint
  • Management's product revenue guidance for upcoming financial year 2023 is $1.89 billion at the midpoint, in line with analyst estimates and translating to 66% year on year growth
  • Free cash flow of $70.7 million, up from $9.46 million in previous quarter
  • Net Revenue Retention Rate: 178%, up from 173% previous quarter
  • Customers: 5,944, up from 5,416 in previous quarter
  • Gross Margin (GAAP): 65%, up from 56.4% 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 year, growing from quarterly revenue of $190.4 million, to $383.7 million.

Snowflake Total Revenue

This was another standout quarter with the revenue up a splendid 101% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $49.3 million in Q4, compared to $62.2 million in Q3 2022. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

For the upcoming financial year management expects product revenue to be $1.89 billion at the midpoint

Customer Growth

You can see below that Snowflake reported 5,944 customers at the end of the quarter, an increase of 528 on last quarter. That is a fair bit better customer growth than last quarter and quite a bit above the typical customer growth we have seen lately, demonstrating that the business itself 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

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 178% in Q4. That means even if they didn't win any new customers, Snowflake would have grown its revenue 78% year on year. Significantly up from the last quarter, 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.

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% in Q4.

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. 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.

Cash Is King

If you follow 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 $70.7 million in Q4, up 866% year on year.

Snowflake Free Cash Flow

Snowflake has generated $81.1 million in free cash flow over the last twelve months, a solid 6.65% of revenues. This FCF margin is a result of Snowflake asset lite business model, and provides it with a decent amount of cash to invest in the business.

Key Takeaways from Snowflake's Q4 Results

Sporting a market capitalization of $80.6 billion, more than $3.85 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 the exceptional revenue growth Snowflake delivered this quarter. And we were also glad to see the improvement in net revenue retention rate. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. But investors might have been expecting more than guidance just in line with estimates considering the high valuation and the company is down 28.5% on the results and currently trades at $190.01 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 good 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 very efficient customer acquisition hints at the potential for strong profitability.

Snowflake's price to sales ratio based on the next twelve months of 41.2x 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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