Snowflake Inc. — Fiscal 2023 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended July 31, 2022; comparisons are to the periods ended July 31, 2021. Snowflake provides a consumption-based cloud data platform and reports as one operating segment.
Financial results and key metrics
| Metric | Q2 FY2023 | Q2 FY2022 | Change |
|---|---|---|---|
| Revenue | $497.2 million | $272.2 million | +83% |
| Product revenue | $466.3 million | $254.6 million | +83% |
| Gross profit | $324.0 million | $166.1 million | +95% |
| Gross margin | 65% | 61% | +4 percentage points |
| Operating loss | $(207.7) million | $(200.1) million | Loss increased |
| Net loss | $(222.8) million | $(189.7) million | Loss increased |
| Net loss per share | $(0.70) | $(0.64) | More negative |
| Operating cash flow | $64.4 million | $(6.1) million | Improved |
| Free cash flow | $53.8 million | $(12.0) million | Improved |
For the six months ended July 31, 2022, revenue was $919.6 million, up 84%; gross margin was 65% versus 59%; operating loss was $396.5 million versus $405.7 million; and net loss was $388.6 million versus $392.9 million. Operating cash flow was $249.0 million versus $15.7 million, while investing cash flow was $(386.2) million, primarily due to investment purchases and the Streamlit acquisition.
Operating expenses for the quarter were $531.7 million, or 107% of revenue, compared with $366.2 million, or 135%, in the prior-year quarter. Sales and marketing was $274.6 million, research and development was $183.7 million, and general and administrative expense was $73.4 million. Stock-based compensation was $209.2 million for the quarter and $381.7 million for the six-month period; $2.4 billion remained to be recognized over a weighted-average period of 3.2 years.
Liquidity, investments, and capital structure
- Cash and cash equivalents were $906.7 million at July 31, 2022.
- Short-term and long-term investments totaled $4.13 billion; management reported total cash, cash equivalents, and investments of approximately $5.0 billion.
- The filing does not report outstanding borrowings or traditional debt. Lease liabilities totaled $241.8 million, including current and non-current amounts.
- Total assets were $7.06 billion and accumulated deficit was $2.31 billion.
- Management believes existing liquidity and operating cash flows will fund working capital and capital expenditure needs for at least the next 12 months and beyond.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by increased consumption by existing customers. Net revenue retention was 171%, down from 176% at January 31, 2022 but up from 169% a year earlier.
- Total customers increased to 6,808 from 4,996 a year earlier and 5,965 at January 31, 2022. Customers with trailing twelve-month product revenue above $1 million increased to 246 from 116 a year earlier.
- Product gross margin improved to 72% from 68% in the quarter, reflecting higher-priced editions, scale across cloud regions, and higher volume discounts from cloud providers.
- Operating losses remained substantial despite improved operating leverage, as Snowflake continued investing in sales, marketing, research and development, and international expansion.
- Interest income increased to $11.7 million from $2.2 million, while other income and expense shifted to a net expense of $22.9 million from income of $8.7 million, primarily because of a $26.6 million impairment of non-marketable strategic investments.
- On March 31, 2022, Snowflake acquired Streamlit for $650.8 million, consisting of $211.8 million in cash and $438.9 million of common stock. The transaction added approximately $494.2 million of goodwill and $150.0 million of developer-community intangible assets.
Guidance, outlook, commentary, and risks
- Remaining performance obligations were $2.7 billion at July 31, 2022, with approximately 57% expected to be recognized as revenue in the following 12 months. Recognition remains dependent on customer consumption and may fluctuate.
- Management expects product gross margin to remain relatively flat for fiscal 2023 and expects positive operating cash flow for the full fiscal year. The filing does not provide a clear GAAP revenue or earnings guidance figure in the supplied text.
- Management intends to continue significant investment in platform development, sales and marketing, professional services, headcount, international expansion, and the Data Cloud.
- Key risks include the consumption-based model’s limited revenue visibility; competition from AWS, Microsoft Azure, Google Cloud, legacy database providers, and emerging entrants; dependence on third-party public-cloud infrastructure; cybersecurity and service availability risks; macroeconomic and customer-spending volatility; foreign exchange exposure; and difficulty achieving or sustaining profitability.
- Professional services remained loss-making, with a gross margin of negative 34% in the quarter and negative 33% for the six-month period.
- In August 2022, Snowflake agreed to acquire Applica for approximately $175 million in cash, subject to customary adjustments and closing conditions. The transaction was expected to close in the quarter ending October 31, 2022.
- Snowflake entered into a modified office lease with a total commitment of $68.0 million and had $17.1 million of cash-collateralized letters of credit outstanding. Management stated that current legal proceedings were not expected to have a material adverse effect.
Most important facts for investors to verify
- Whether customer consumption, net revenue retention, and large-customer expansion remain strong as macroeconomic conditions evolve.
- The sustainability of the 72% product gross margin and the effect of cloud-provider pricing, discounts, infrastructure costs, and platform efficiencies.
- The path toward profitability given continued operating losses, substantial stock-based compensation, and $2.4 billion of unrecognized equity compensation.
- The conversion and timing of the $2.7 billion RPO, recognizing that consumption and rollover provisions limit visibility.
- The integration and strategic contribution of Streamlit and the expected cost and benefits of the Applica acquisition.
- Exposure to strategic-investment volatility, interest-rate changes, foreign exchange movements, cybersecurity incidents, cloud outages, and potential additional capital needs.