Strictly Business: Snowflake Earnings Recap

Thoughts on SNOW's recent report.

SNOW -6.29%↓ – 🤮

I know I can’t send a single emoji as a recap, but that’s the TL;DR version. Snowflake’s $555M in Q4 product revenue and $573M Q1 guide weren’t far off my $558M and $577.5M estimates. However, the outlook for the year beyond was pretty nauseating.

The details:

• I’m keeping my fingers crossed for a raise to last quarter’s FY24 pre-estimate of 47% revenue growth. CEO Frank Slootman has been playing this game a long time, so I’d consider it a disappointment if he floated an initial number he can’t raise when it becomes official. In my opinion, everything starts and ends with this. Slootman is a rock-star CEO who knows the game as well as anyone. I’m probably just as shocked as he is at the totally unforced error of having to issue a downgraded 40% guide. I know he’s not stupid, so that means SNOW's business in some way, shape or form cratered since he floated the initial 47%. I can’t color this flag anything but red.

• Continued strength in gross margins as Snowflake scales. Last quarter’s 71.3% total and 75.4% product gross margin were the best yet. I’d like to see similar. 70.8% and 75.0% are close enough. At least incoming business is being handled with similar leverage. Will it hold?

• SNOW’s usual best in class net retention rate. I’m not expecting it to hold 165% but would prefer we don’t see too much of a drop off. When combined with the newly lowered guide, 158% is enough to get me nervous. I can’t see how this doesn’t experience a swift decline during the upcoming year.

• Q4 has traditionally been Snowflake’s strongest quarter for new customers. I’d like that to continue. Total customer adds were fine. However, SNOW only landed 19 Global 2000 customers versus 30 last quarter and 20 last year. I know there’s lumpiness here but still would have preferred more given management specifically shifted its sales focus from the Fortune 500 to the G2000.

• Continued efficiency in expenses as a percentage of revenue after Q3’s record-low 63.5%. This ticked up a notch to 65.3%. A minor fail accentuated by the lowered outlook.

• Continued strength in cash flows with profit margins remaining solidly positive. Good here with a strong FY24 guide. Unfortunately, it’s not strong enough to ease my angst about the lowered growth.

• The usual Q4 strength in Remaining Performance Obligation. When asked last quarter the CFO specifically stated he saw no material RPO headwinds for Q4. I’ll be holding him to that comment. A disappointment. While $3.66B is an impressive total, RPO growth plummeted from 67% YoY in Q3 to 38% this quarter. The sequential $658M add was also down from $842M last Q4. Honestly, the dollar decline bothers me more than rate.

• Management’s usual confidence about the future. Again, this group has been around the block a few times. I expect to leave the call feeling Snowflake is on firm footing. Well, I guess even Slootman and CEO Frank Scarpelli are human. While neither can be blamed for the “change in existing customer purchasing behavior, lower-than-expected new logo bookings, and slower expected ramp from our youngest cohorts,” it’s their responsibility to figure it out. The tone I heard suggests both their jobs just got a lot harder.

Man, it sure is tough owning companies hitting law-of-large-numbers scale in a tightening economy. Snowflake has always gotten a premium for its impressive numbers, unassailable management team, and what seemed to be an avalanche of data migrating to the cloud. I leave this report thinking every single one of those advantages just evaporated. Will they ever return? Darned if I know. I only know much if not all that premium might be on the verge of evaporating as well. We’ll see what Mr. Market decides.

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After repeated requests, I’ve started adding the section below to these recaps. However, EVERYONE MUST MAKE THEIR OWN DECISION. I can only state what I am doing with our shares and not what anyone else should do with theirs. We all must manage our own situation.

Not much to say here. We’re out. I feel fortunate I was patient in building this position and had an overall cost basis around $135. I’d put the average of our after hours exits around $145. I still admire Snowflake enough to keep it on our watch list. However, I feel no real desire to hold shares while other 40% growers are available at much lower multiples.

Good luck to any holders whatever you decide.