SNOW • 10-Q • Q2 2023 • Positive

Snowflake's Revenue Growth Decelerates to 37% as Enterprise Spending Tightens

August 31, 2023 • 1 min read

TL;DR

Snowflake's Q2 performance revealed continued but decelerating growth amid enterprise spending scrutiny. Revenue grew 37% YoY to $674M, down from 83% growth a year ago, while remaining performance obligations hit $3.5B. Product gross margins improved to 75%, demonstrating scaling efficiency despite growth moderation. Customer acquisition remains strong with 8,537 total customers (+24% YoY), though consumption patterns show increased optimization. The results suggest a strategic pivot toward prof

Financial Performance Overview: Revenue grew 37% YoY to $674M, marking continued deceleration from 83% YoY growth in Q2'22. Product revenue, representing 94% of total revenue, increased 37% to $640M. Net revenue retention rate declined to 142% from 171% last year, reflecting customer optimization efforts. Operating margin improved to -4% from -20% YoY, showing operational leverage despite growth moderation. Cash and investments remained strong at $4.9B, providing runway for strategic investments.
Strategic Initiatives and Operational Changes: Management is pivoting toward efficiency and profitability with increased focus on enterprise penetration. New product launches including Snowpark Container Services and Snowflake Cortex aim to expand platform capabilities. Go-to-market strategy shifts toward industry-specific solutions and partner ecosystem expansion. Sales productivity metrics improved with larger deal sizes despite longer sales cycles. Investment in vertical-specific solutions shows early traction in financial services and healthcare.
Market Position and Competitive Dynamics: Snowflake maintained leadership in cloud data warehousing with 36% market share. Customer count grew to 8,537 with 373 customers contributing >$1M in product revenue. Competitive pressure from hyperscalers intensified, particularly in mid-market segments. Enterprise customer penetration improved with 590 Forbes Global 2000 customers. Multi-cloud strategy continues providing competitive advantage with 18% of customers using multiple clouds.
Operational Efficiency and Profitability: Product gross margin expanded 200bps YoY to 75%, demonstrating improved scale efficiencies. Operating expenses grew 17% YoY, significantly slower than revenue growth. Sales efficiency metrics improved with CAC payback period reducing to 18 months from 22 months. R&D investment increased 28% YoY to $215M as company doubles down on AI/ML capabilities. Free cash flow margin improved to 12% from -3% YoY.
Growth Catalysts and Material Risks: Near-term growth catalysts include Snowpark adoption, vertical solution traction, and international expansion. Macro headwinds persist with continued customer consumption optimization and elongated sales cycles. Material risks include hyperscaler competition, data governance regulations, and potential cloud spending rationalization. AI/ML workload acceleration presents significant opportunity but requires continued innovation. Management expects consumption growth reacceleration in second half contingent on macro improvement.

Revenue

$674M ( YoY, QoQ) with product revenue at $640M ( YoY)

↑ +37%

Rd Spend

$215M ( YoY) representing of revenue

↑ +28%

Net Income

-$227M improved from -$293M YoY with operating margin at -4%

Gross Margin

(+200bps YoY) driven by platform efficiency improvements

↑ 75%

Free Cash Flow

$88M vs -$12M YoY with FCF margin

↑ 13%

Operating Margin

-4% (+1600bps YoY) showing significant operational leverage

Growth Indicators

8,537 total customers ( YoY)

↑ +24%

Arr Or Bookings ↑$3.5B remaining performance obligations (+42% YoY)

Retention Metrics ↑142% net revenue retention rate (down from 171% YoY)

Key Risks

Consumption optimization impacting growth with 142% net retention vs 171% YoY
Hyperscaler competition intensifying particularly in mid-market segment
Macro uncertainty extending sales cycles and impacting new customer acquisition
Regulatory complexity increasing compliance costs and go-to-market friction

Key Opportunities

AI/ML workload acceleration with $70T data and AI TAM by 2026
Vertical solution expansion in regulated industries with <30% current penetration
International growth with 43% YoY expansion outpacing overall company growth
Platform expansion beyond core data warehouse into full data cloud stack

Bottom Line

Snowflake's Q2 results demonstrate successful navigation of challenging macro environment while maintaining strong growth and improving profitability. The strategic pivot toward efficiency without sacrificing innovation positions the company well for sustainable growth. Key metrics to watch include consumption patterns, AI workload adoption, and international expansion traction. The company's execution in balancing growth and profitability provides blueprint for scaled software businesses. The contrarian insight is that moderating growth may actually strengthen competitive position by forcing focus on sustainable unit economics.