SNOW • 10-Q • Q4 2022 • Positive

Snowflake's Rapid Growth Continues Despite Macro Headwinds, But Margins Under Pressure

December 02, 2022 • 1 min read

TL;DR

Snowflake continues its strong growth trajectory with revenue up 67% YoY to $557M, though showing signs of macro pressure in consumption patterns. Product revenue reached $523M, representing 83% of total revenue, while remaining performance obligations grew 66% YoY to $3B. Operating margins declined 200bps YoY to -42% as investments in sales and R&D increased. Customer acquisition remains robust with 7,292 total customers, including 287 customers with >$1M in trailing 12-month product revenue.

Financial Performance Overview: Revenue growth remained strong at 67% YoY but decelerated from 83% in the previous quarter, indicating some macro headwinds affecting consumption patterns. Gross margin improved slightly to 75% (+100bps YoY) due to improved resource utilization and scale benefits. Operating losses widened to $233M as the company continued aggressive investments in sales capacity and product development. Net revenue retention rate remained healthy at 165% but declined from 173% in the previous quarter.
Strategic Initiatives and Operational Changes: Snowflake is accelerating investments in its application development platform with the launch of Snowpark and native app development capabilities. The company expanded its industry vertical focus, particularly in healthcare and financial services, with new partnerships and compliance certifications. Management emphasized a shift toward enterprise-focused go-to-market strategies, including increased field sales presence in key accounts. These initiatives are expected to pressure margins near-term but drive higher-value customer relationships.
Market Position and Competitive Dynamics: Snowflake maintained its leadership position in the cloud data warehouse market, though facing increased competition from cloud hyperscalers. The company's multi-cloud strategy continues to differentiate its offering, with 20% of customers now using cross-cloud capabilities. Customer concentration improved with no single customer representing >5% of revenue. The company expanded international presence with revenue outside North America growing 75% YoY.
Operational Efficiency and Profitability: Operating leverage remains challenged as Snowflake invests heavily in growth initiatives. Sales efficiency metrics showed some deterioration with CAC payback periods extending to 18 months from 15 months year-ago. R&D expenses grew 89% YoY as the company accelerated product development. The company maintains strong unit economics with gross margin improvements, but path to profitability extends as growth investments continue.
Growth Catalysts and Material Risks: Key growth drivers include expansion of the Snowflake Data Cloud ecosystem, increased adoption of data sharing capabilities, and penetration of new verticals. Macro headwinds pose near-term risks to consumption-based revenue model. Competition from major cloud providers and potential pricing pressure remain key concerns. International expansion and product innovation expected to drive growth but require significant investment.

Revenue

$557M ( YoY, QoQ) with product revenue at $523M

↑ +67%

Rd Spend

$154M ( YoY) representing of revenue

↑ +89%

Net Income

-$201M ( margin, -800bps YoY)

↓ -36%

Gross Margin

(+100bps YoY) driven by scale benefits

↑ 75%

Free Cash Flow

$65M ( margin) demonstrating underlying model strength

↑ 12%

Operating Margin

(-200bps YoY) due to growth investments

↓ -42%

Growth Indicators

7,292 total ( YoY), 287 >$1M customers ( YoY)

↑ +34%

Arr Or Bookings ↑$3B in remaining performance obligations (+66% YoY)

Retention Metrics ↑165% net revenue retention rate (-800bps YoY)

Key Risks

Macro-driven consumption moderation impacting revenue growth
Intensifying competition from cloud providers with pricing pressure
High investment requirements impacting path to profitability
Customer concentration in technology sector

Key Opportunities

International expansion with <30% revenue outside North America
Application development platform expanding TAM significantly
Vertical-specific solutions driving deeper customer relationships
Data sharing network effects creating competitive moat

Bottom Line

Snowflake's Q4 results demonstrate the company's ability to maintain strong growth while navigating an increasingly complex macro environment. The strategic focus on enterprise customers and platform expansion appears sound but requires significant investment that will pressure near-term profitability. Key metrics around customer growth and retention remain healthy, though showing early signs of consumption moderation that bear watching. The company's competitive position remains strong, but increased competition from cloud providers requires continued innovation and differentiation. Success of strategic initiatives around application development and industry verticals will be critical for maintaining growth trajectory and justifying current investment levels.