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Snowflake (NYSE:SNOW) Beats Q1 Sales Targets But Stock Drops 10.5%


Full Report / July 07, 2022
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Data warehouse-as-a-service Snowflake (NYSE:SNOW) reported results ahead of analyst expectations in the Q1 FY2023 quarter, with revenue up 84.5% year on year to $422.3 million. Snowflake made a GAAP loss of $165.7 million, improving on its loss of $203.2 million, in the same quarter last year.

Snowflake (SNOW) Q1 FY2023 Highlights:

  • Revenue: $422.3 million vs analyst estimates of $147.6 million (2.26% beat)
  • EPS (GAAP): -$0.53
  • Product revenue guidance for Q2 2023 is $437.5 million at the midpoint
  • Free cash flow of $172.3 million, up 143% from previous quarter
  • Net Revenue Retention Rate: 174%, down from 178% previous quarter
  • Customers: 6,322, up from 5,944 in previous quarter
  • Gross Margin (GAAP): 64.9%, up from 57.4% 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 $228.9 million, to $422.3 million.

Snowflake Total Revenue

This was another standout quarter with the revenue up a splendid 84.5% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $38.5 million in Q1, compared to $49.3 million in Q4 2022. 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 60.7% over the next twelve months.

Customer Growth

You can see below that Snowflake reported 6,322 customers at the end of the quarter, an increase of 378 on last quarter. That is a fair bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

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 174% in Q1. That means even if they didn't win any new customers, Snowflake would have grown its revenue 74% 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 64.9% in Q1.

Snowflake Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.64 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it trending up over the last year this would still be considered low gross margin for a SaaS company and we have no doubt shareholders 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 $172.3 million in Q1, up year on year.

Snowflake Free Cash Flow

Snowflake has generated $240.6 million in free cash flow over the last twelve months, a solid 17% of revenues. This strong FCF margin is a result of Snowflake asset lite business model and provides it plenty of cash to invest in the business.

Key Takeaways from Snowflake's Q1 Results

Sporting a market capitalization of $40.7 billion, more than $3.81 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 excited to see that it outperformed analysts' revenue expectations. On the other hand, it was unfortunate to see the slowdown in customer growth and the revenue retention rate deteriorated a little. Zooming out, we think this was still a decent, albeit mixed, quarter, showing the company is staying on target. The company currently trades at $154.5 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 very efficient customer acquisition hints at the potential for strong profitability.

Snowflake's price to sales ratio is suggesting that the market is expecting more measured growth, relative to the hottest tech stocks. Looking at the tech landscape today, Snowflake's qualities as a business really stand out and we do like the look of the company at current prices.

The Wall St analysts covering the company had a one year price target of $310.8 per share right before these results, implying that they saw upside in buying Snowflake even in the short term.

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