Snowflake Inc. 10-Q Summary
Business context and reporting period
Snowflake provides a cloud-based, consumption-based data platform and Data Cloud across AWS, Microsoft Azure, and Google Cloud. This unaudited Form 10-Q covers the three months ended April 30, 2023, the first quarter of fiscal 2024, with comparisons to the three months ended April 30, 2022. Snowflake reports one operating segment.
Financial results and key metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Revenue | $623.6 million | $422.4 million | 48% |
| Product revenue | $590.1 million | $394.4 million | 50% |
| Gross profit | $414.2 million | $274.4 million | 51% |
| Gross margin | 66% | 65% | +1 percentage point |
| Operating loss | $273.2 million | $188.8 million | Loss increased |
| Net loss attributable to Snowflake | $225.6 million | $165.8 million | Loss increased |
| Net loss per share | $0.70 | $0.53 | Loss increased |
| Net cash provided by operating activities | $299.4 million | $184.6 million | 62% |
| Free cash flow, non-GAAP | $283.1 million | $172.4 million | 64% |
Product gross margin was 73%, compared with 72% in the prior-year quarter. Professional services and other revenue was $33.5 million, or 5% of revenue, while its gross margin was negative 49%. Stock-based compensation was $264.5 million, equal to approximately 42% of revenue, compared with $172.5 million, or approximately 41%, in the prior-year quarter. Total unrecognized compensation cost for unvested awards was $3.1 billion as of April 30, 2023.
Interest income rose to $43.1 million from $4.8 million due primarily to higher investment yields. The effective tax rate was 2.8%, compared with 13.9%, and Snowflake maintained a full valuation allowance against its U.S. and U.K. deferred tax assets.
At April 30, 2023, Snowflake had $653.0 million of cash and cash equivalents, $4.4 billion of investments at estimated fair value, and $17.8 million of restricted cash. The filing does not report funded debt; reported liabilities primarily include deferred revenue and operating lease liabilities. Total liabilities were $2.1 billion, including $254.8 million of operating lease liabilities. Deferred revenue was $1.6 billion current and $14.2 million non-current.
Operating cash flow benefited substantially from collections and working-capital movements, including a $362.9 million decrease in accounts receivable, partly offset by a $110.5 million decrease in deferred revenue. Investing cash flow was negative $362.2 million, including $222.8 million of net investment purchases and $123.1 million paid for acquisitions. Financing cash flow was negative $223.7 million, including $191.7 million of stock repurchases and $84.4 million of payroll taxes on equity award settlements.
Business metrics and material changes
- Total customers increased to 8,167 from 7,850 at January 31, 2023.
- Customers generating more than $1 million of trailing 12-month product revenue increased to 373 from 330 at January 31, 2023 and 207 a year earlier.
- Net revenue retention declined to 151% from 158% at January 31, 2023 and 174% a year earlier.
- Forbes Global 2000 customers increased to 590 from 580 at January 31, 2023.
- Remaining performance obligations were $3.4 billion, down from $3.7 billion at January 31, 2023 but up from $2.6 billion a year earlier. Snowflake expects approximately 57% to be recognized as revenue in the twelve months ending April 30, 2024, subject to customer consumption.
- Sales and marketing expense increased 36% to $331.6 million, research and development increased 84% to $277.4 million, and general and administrative expense increased 15% to $78.5 million. Research and development included a $7.1 million impairment charge for internal-use software costs no longer probable of completion.
- Snowflake acquired Mountain US Corporation for approximately $76.3 million and LeapYear Technologies for approximately $62.0 million in cash on February 10, 2023. Their contribution to revenue was not material through April 30, 2023.
- Snowflake authorized a $2.0 billion stock repurchase program in February 2023. It repurchased 1.4 million shares for $191.7 million during the quarter, leaving $1.8 billion available through the program’s March 2025 expiration.
Outlook, management commentary, risks and unusual items
Management expects to continue investing heavily in research and development, sales and marketing, international expansion, artificial intelligence, machine learning, and platform infrastructure, while focusing on profitability and cash flow. Management expects positive operating cash flow for fiscal 2024 and believes existing liquidity and expected operating cash flow will fund working capital, capital expenditures, acquisitions, strategic investments, and authorized repurchases for the next twelve months and beyond. The filing does not provide a clear numerical revenue or earnings guidance figure.
Management reported that, from April 2023 through the filing date, customer consumption was lower than expected or increased at a slower pace than expected. Customers are rationalizing budgets, shortening contract durations, optimizing workloads, and reducing storage through shorter data-retention policies. Because revenue is recognized based primarily on consumption rather than ratably over contract terms, future revenue and margins may be volatile and are difficult to forecast.
Key risks include intensified competition from AWS, Azure, GCP, legacy database providers, and emerging technologies; dependence on third-party public-cloud infrastructure; cybersecurity and data-privacy incidents; service outages; macroeconomic weakness and reduced cloud spending; execution and integration risks from acquisitions; foreign-exchange and interest-rate exposure; substantial stock-based compensation and dilution; and the possibility that Snowflake will not achieve or sustain profitability. Snowflake also disclosed a $37.0 million commitment for a lease commencing in fiscal 2024 and a May 26, 2023 acquisition of Neeva Inc. for approximately $150 million in cash, subject to customary adjustments.
No current legal proceedings were identified as expected to have a material adverse effect. Disclosure controls and procedures were assessed as effective as of April 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported slowdown in consumption after April 2023 persists and affects product revenue, net revenue retention, RPO conversion, and future guidance.
- The sustainability of positive operating and free cash flow, including the effect of collections, deferred revenue movements, stock-based compensation, repurchases, and acquisitions.
- Progress toward reducing operating losses and the continuing impact of stock-based compensation, which represented approximately 42% of quarterly revenue.
- Whether customer growth and growth in large customers offset declining net revenue retention and consumption optimization.
- The integration, purchase accounting, and strategic returns of Mountain, LeapYear, and Neeva.
- The remaining authorization and future timing of stock repurchases relative to liquidity and investment needs.
- Exposure to public-cloud pricing, minimum commitments, outages, cybersecurity events, privacy regulation, and competitive pressure.