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 across the Data Cloud. The unaudited report covers the three and nine months ended October 31, 2020, with comparisons to the same periods in 2019. Snowflake completed its initial public offering in September 2020 and became listed on the New York Stock Exchange.
Key Financial Metrics
| Metric | Three Months Ended October 31 | Nine Months Ended October 31 |
|---|---|---|
| Revenue | $159.6 million, up 119% | $401.6 million, up 127% |
| Product revenue | $148.5 million, up 115% | $375.5 million, up 121% |
| Professional services and other revenue | $11.2 million, up 194% | $26.1 million, up 259% |
| Gross profit | $92.9 million | $241.9 million |
| Gross margin | 58%, compared with 60% | 60%, compared with 54% |
| Operating loss | $169.5 million | $343.5 million |
| Net loss | $168.9 million, or $1.01 per share | $340.2 million, or $3.63 per share |
| Operating cash flow | Not provided for the quarter | $(65.0) million |
As of October 31, 2020, cash and cash equivalents were $3.94 billion, short-term investments were $814.1 million, and long-term investments were $347.4 million. Total cash, cash equivalents, and investments were approximately $5.1 billion. Current liabilities were $547.7 million, including $438.2 million of current deferred revenue. The filing does not report outstanding debt; lease liabilities totaled $206.1 million.
Remaining performance obligations were $927.9 million, including $560.1 million related to contracts with original terms exceeding one year. Net revenue retention was 162%, total customers were 3,554, and 65 customers generated more than $1 million of trailing twelve-month product revenue. Fortune 500 customers represented approximately 28% of nine-month revenue.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by increased consumption by existing customers, higher capacity-sales pricing, and improved discount discipline.
- Product gross margin increased to 65% for both the quarter and nine-month period, compared with 64% and 60%, respectively, in the prior-year periods. Total quarterly gross margin declined because professional services remained loss-making.
- Operating expenses increased substantially: sales and marketing rose 78% for the quarter and 53% year to date; research and development rose 168% and 91%; and general and administrative expense rose 77% and 46%.
- Stock-based compensation increased to $119.4 million for the quarter and $158.8 million year to date, partly due to accelerated recognition after IPO-related performance conditions for restricted stock units were satisfied.
- Net cash used in operating activities improved from $133.8 million to $65.0 million year to date, primarily due to increased customer collections and deferred revenue, but operating cash flow remained negative.
- The September IPO and concurrent private placements generated approximately $4.2 billion of net financing proceeds. Preferred shares converted into Class B common stock, producing a significant increase in stockholders’ equity.
Guidance, Outlook, Commentary, Risks, and Unusual Items
Management expects to continue investing significantly in platform development, sales and marketing, professional services, international expansion, and public-company infrastructure rather than optimizing for near-term profitability or cash flow. Management expects product gross margin to improve for fiscal 2021 compared with fiscal 2020, but cautions that customer-consumption mix, infrastructure costs, marketplace arrangements, and investment levels could cause fluctuations.
Management stated that existing cash, cash equivalents, and investments should fund working capital and capital expenditures for at least the next 12 months. Snowflake has no annual minimum purchase requirement under one amended cloud agreement but committed to at least $550.0 million of cloud infrastructure spending through December 2025. A separate amended agreement requires $1.2 billion of cloud infrastructure spending from August 2020 through July 2025, with payments potentially required for shortfalls.
The COVID-19 pandemic lengthened some sales cycles and delayed professional services and training, while also contributing to increased consumption by some existing customers and lower travel and event costs. Management could not reasonably estimate the pandemic’s future impact.
Key risks include continued operating losses, limited operating history, consumption-driven revenue variability, intense competition from AWS, Microsoft Azure, Google Cloud and other providers, dependence on third-party cloud infrastructure, security breaches or service outages, customer concentration and enterprise sales-cycle risk, international expansion, data privacy and regulatory compliance, intellectual-property litigation, and volatility associated with the dual-class capital structure. The filing identifies a Yeti Data trademark-infringement lawsuit; management believes it has valid defenses but cannot assure a favorable outcome.
Unusual items include the IPO-related equity issuance, substantial IPO-triggered stock-based compensation recognition, a $7.1 million cash acquisition, $6.2 million of patent purchases, and significant increases in cloud infrastructure commitments. Disclosure controls and procedures were assessed as effective at the reasonable-assurance level, with no material changes to internal control over financial reporting reported during the period.
Important Facts for Investors to Verify
- Whether consumption growth, net revenue retention, and customer additions remain strong as the customer base matures.
- The sustainability of 65% product gross margin and the timing of improvement in professional-services margins.
- The magnitude and cash-flow impact of stock-based compensation and future equity dilution; $664.5 million of unrecognized compensation cost remained at October 31, 2020.
- Whether operating cash flow turns positive without relying on IPO proceeds or increases in deferred revenue.
- Actual utilization of the $550.0 million and $1.2 billion cloud infrastructure commitments and any resulting shortfall obligations.
- The effects of COVID-19, customer budget changes, sales-cycle lengthening, and potential collection risk.
- Competition and pricing pressure from the public-cloud providers on which Snowflake depends.
- The Yeti Data litigation, other intellectual-property claims, and potential indemnification exposure.
- The implications of Class B shares carrying ten votes per share and representing approximately 98% of voting power as of October 31, 2020.