Snowflake Inc. Form 10-Q Summary
Business context and reporting period
Snowflake provides a cloud-based, consumption-based data platform supporting data consolidation, analytics, applications, and data sharing through its Data Cloud. This unaudited Form 10-Q covers the three months ended April 30, 2021, compared with the three months ended April 30, 2020. The fiscal year ends January 31.
Financial performance and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Revenue | $228.9 million | $108.8 million | 110% |
| Product revenue | $213.8 million | $101.8 million | 110% |
| Gross profit | $131.6 million | $66.3 million | 99% |
| Gross margin | 57% | 61% | Down 4 points |
| Operating loss | $205.6 million | $96.4 million | Up 113% |
| Net loss | $203.2 million | $93.6 million | Up 117% |
| Net loss per share | $0.70 | $1.72 | Improved per share due to share count growth |
| Cash flow from operations | $21.9 million provided | $6.6 million used | Improved $28.4 million |
Product gross margin was 66%, compared with 65% in the prior-year quarter. Professional services and other revenue generated a negative gross margin of 68%, causing total gross margin to decline. Operating expenses were $337.2 million, or 147% of revenue, versus $162.7 million, or 149% of revenue, in the prior-year period.
- Sales and marketing expense increased 70% to $166.8 million.
- Research and development expense increased 230% to $109.8 million.
- General and administrative expense increased 92% to $60.6 million.
- Stock-based compensation increased to $151.0 million from $20.4 million and represented a significant portion of the operating loss.
- As of April 30, 2021, cash and cash equivalents were $644.7 million, short-term investments were $3.286 billion, and long-term investments were $1.178 billion. Total cash, cash equivalents, and investments were approximately $5.1 billion.
- Total liabilities were $970.7 million, primarily consisting of deferred revenue and operating lease liabilities. The filing does not disclose outstanding borrowings or conventional debt.
- Deferred revenue was $638.7 million, and remaining performance obligations were $1.4 billion, with approximately 54% expected to be recognized as revenue during the twelve months ending April 30, 2022, subject to customer consumption.
Material changes versus the prior comparable period
- Revenue more than doubled, primarily due to increased consumption by existing customers, higher capacity sales prices, and growth in professional services.
- Customer count increased to 4,532 from 2,720. Customers with trailing twelve-month product revenue above $1 million increased to 104 from 48.
- Net revenue retention was 168%, compared with 171% in the prior-year comparable period and 168% at January 31, 2021.
- Total gross margin declined because professional services expanded faster than its related revenue and remained loss-making, while product gross margin improved modestly.
- Operating and net losses increased as Snowflake expanded sales, marketing, research and development, professional services, and corporate infrastructure.
- Stock-based compensation rose substantially, including $74.1 million related to pre-IPO RSUs whose performance condition became satisfied upon the IPO. Unrecognized compensation cost was $1.5 billion as of April 30, 2021.
- On March 1, 2021, all outstanding Class B common stock automatically converted into Class A common stock, eliminating the dual-class structure and reducing voting rights for former Class B holders from ten votes per share to one vote per share.
- Snowflake adopted new accounting guidance for credit losses, cloud-computing implementation costs, and income taxes effective February 1, 2021; the filing states that these adoptions did not have a material impact.
Guidance, outlook, commentary, risks, and unusual items
- Management expects to continue investing significantly in platform development, sales and marketing, professional services, international expansion, and other infrastructure rather than optimizing for near-term profitability or cash flow.
- Management expects sales and marketing, research and development, and general and administrative expenses to increase in absolute dollars but generally decline as percentages of revenue over time.
- Management expects product gross margin to improve for fiscal 2022 compared with fiscal 2021, although consumption mix, pricing, cloud infrastructure costs, discounting, and investment levels could limit improvement.
- Management expects net cash used in operating activities to decrease for fiscal 2022 compared with fiscal 2021 and believes existing cash, cash equivalents, and investments are sufficient for at least the next twelve months.
- Revenue timing is inherently variable because revenue is generally recognized as customers consume compute, storage, and data-transfer resources. RPO and deferred revenue therefore may not reliably predict near-term revenue.
- COVID-19 did not adversely affect results during the quarter overall, but contributed to longer sales cycles, delays in professional services and training, reduced travel and event costs, and increased consumption by some existing customers. Future effects remain uncertain.
- Key risks include sustained operating losses, dependence on AWS, Azure, and Google Cloud Platform, competition from those cloud providers and other data-platform vendors, security breaches, service outages, data privacy and regulatory obligations, customer consumption volatility, international expansion, and dependence on key personnel.
- As of April 30, 2021, the company had $16.1 million of cash-collateralized letters of credit, substantially for leased facilities. The filing states that no current legal proceedings are expected to have a material adverse effect.
- Interest-rate sensitivity was significant: a hypothetical 10% increase in interest rates would have reduced the market value of cash equivalents and investments by approximately $272.0 million, while a 10% decrease would have increased it by approximately $7.0 million.
Important facts for investors to verify
- Whether customer consumption, net revenue retention, customer additions, and expansion among large customers continue to support the reported growth rate.
- Whether product gross-margin improvement offsets the negative margin of the professional services business and rising public-cloud infrastructure costs.
- The future cash and earnings impact of $1.5 billion in unrecognized stock-based compensation and continued equity issuance.
- Whether the company can reduce operating losses while maintaining planned investments in growth.
- The timing and reliability of revenue expected from the $1.4 billion RPO, given consumption-based recognition and rollover provisions.
- Exposure to AWS, Azure, and Google Cloud Platform pricing, availability, competitive actions, and contractual terms.
- Potential effects of COVID-19, cybersecurity incidents, privacy regulation, litigation, foreign exchange, and interest-rate changes.