SNOW • 10-Q • Q2 2024 • Positive

Snowflake's Growth Decelerates to 37% as Enterprise AI Initiatives Drive Strategic Pivot

August 29, 2024 • 1 min read

TL;DR

Snowflake posted Q2 revenue of $674M (+37% YoY), marking continued deceleration from 83% growth a year ago as enterprise spending optimization persists. Product revenue, representing 94% of total revenue, grew 39% YoY to $640M. The company's strategic pivot toward AI/ML workloads is gaining traction with Snowpark adoption up 3.8x YoY. Remaining performance obligations reached $3.5B (+30% YoY), suggesting sustained but moderating growth ahead as the company balances efficiency with expansion.

Financial Performance Overview: Revenue growth continued to moderate with Q2 revenue reaching $674M, up 37% YoY but down from 83% growth in the year-ago quarter. Gross margin improved 100bps YoY to 75%, while operating margin remained negative at -3%. Net revenue retention rate declined to 142% from 171% last year, reflecting both a maturing customer base and enterprise spending optimization. The company maintained strong cash generation with operating cash flow of $88M (13% margin) despite growth investments.
Strategic Initiatives and Operational Changes: Snowflake is aggressively pivoting toward AI/ML workloads through Snowpark and new partnerships with NVIDIA and Databricks. The company launched Native App Framework generally available and expanded vertical-specific solutions in healthcare and financial services. Management is prioritizing enterprise expansion with 402 customers now generating >$1M in trailing revenue (+52% YoY). Investments in sales capacity and product development increased operating expenses 39% YoY as the company positions for AI-driven growth.
Market Position and Competitive Dynamics: Customer count grew 25% YoY to 8,537, with enterprise customers (>$1M revenue) growing faster at 52% YoY. The company maintained leadership in Gartner's Magic Quadrant for Cloud Data Warehouses but faces increasing competition from hyperscalers and pure-play AI vendors. Snowflake's data cloud strategy and ecosystem of 1,700+ partners provide competitive moats, though margin pressure from hyperscaler infrastructure costs remains a concern. Customer concentration improved with no single customer exceeding 5% of revenue.
Operational Efficiency and Profitability: Gross margin expanded 100bps YoY to 75% through improved resource optimization and workload management capabilities. Operating margin remained negative at -3% as the company increased investments in AI/ML capabilities and enterprise sales coverage. Stock-based compensation remained elevated at 43% of revenue though improved from 47% in the year-ago period. The company maintained strong unit economics with net dollar retention of 142% despite optimization headwinds.
Growth Catalysts and Material Risks: Near-term growth drivers include Snowpark adoption (+280% YoY), vertical solution expansion, and increasing AI/ML workloads. Key risks include sustained enterprise spending optimization, growing competition in AI infrastructure, and high stock-based compensation. Management expects FY24 product revenue growth of 34% with improving operating leverage. The shift toward AI/ML workloads could accelerate growth but requires significant R&D investment and sales enablement.

Revenue

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

↑ +37%

Rd Spend

$215M ( YoY) representing of revenue

↑ +47%

Net Income

-$97M ( margin) improved from -$223M ( margin) YoY

↓ -14%

Gross Margin

(+100bps YoY) driven by resource optimization

↑ 75%

Free Cash Flow

$62M ( margin) down from $59M ( margin) YoY

↑ 9%

Operating Margin

-3% (+500bps YoY) reflecting continued investments

Growth Indicators

down from YoY

↑ 142%

Customer Count ↑8,537 total customers (+25% YoY), 402 >$1M customers (+52% YoY)

Remaining Performance Obligations ↑$3.5B (+30% YoY)

Key Risks

Enterprise spending optimization impacting consumption growth and sales cycles
Intensifying competition from hyperscalers and AI-native vendors
Elevated stock-based compensation at 43% of revenue affecting profitability
Infrastructure cost dependencies impacting gross margin expansion

Key Opportunities

AI/ML workload expansion through Snowpark with 3.8x YoY adoption growth
Vertical solution penetration in healthcare and financial services
International expansion with 42% YoY growth outside North America
Native App Framework monetization and ecosystem expansion

Bottom Line

Snowflake's Q2 results demonstrate the company's strategic evolution toward AI-enabled workloads while managing growth deceleration and competitive pressures. The successful pivot to AI/ML through Snowpark and ecosystem partnerships provides differentiation, though meaningful revenue impact remains nascent. Management's focus on operational efficiency yielded margin improvements despite aggressive growth investments. Key metrics to watch include Snowpark adoption rates, enterprise customer expansion, and gross margin progression. The company's data cloud strategy and deep ecosystem integration provide defensive moats, though execution in AI/ML capabilities and sales enablement remains critical for reaccelerating growth.