Snowflake Inc. (SNOW) Earnings Call Transcript & Summary

Welcome back, everybody. I'm still Brad Zelnick, Deutsche Bank software team. Delighted to be here for this keynote session, hosting a fireside chat conversation with Snowflake CFO, Mr. Mike Scarpelli, Mike, welcome.

Thank you for having me, Brad.

Always a pleasure, even better to see you here in Las Vegas, where there's casino action and all sorts of fun to be had, in addition to learning a lot of things about good companies like Snowflake.

Yes. first live conference as a public company.

Welcome back. Welcome back. So the format of this session is a fireside chat. I'm going to ask Mike a whole bunch of questions. I'm going to try to keep my eyes on my inbox. In case you have something you'd want to add into the conversation, I'll do my best to weave it in. But with that, let's jump right in.

Maybe, Mike, just to start, you just reported Q2 results last week. What key messages do you hope investors walk away with?

You know, I think the number one thing is, is we are playing in a massive market that's growing, and there's such a huge opportunity. And there are going to be many successful winners in this space. It's not a one take all. So I think that's a really important thing. The other thing is, we are still very much in the early innings with most of our companies that we're dealing with. If you look at the Global 2000, we gave you that metric. We have about 500 of them, and the average revenue is $1.2 million. That is not very big spend on a Global 2000. If you look at our $1 million-plus customers, we're at $3.5 million. It tells you there's a lot of room for growth in those companies. And it's funny. I get all these questions from people and they're saying, well, all customers and the macro uncertainty you're trying to cut costs. Well, you want to know what? $1.2 million in spend, you could let go 5 people, and that covers $1.2 million when you get companies that have 100,000 employees or more. This is not a huge spend for most of our customers. And the other thing, I think, that's important too is with many of our customers, they don't necessarily see us as a cost. They see us as helping drive their business and even new revenue streams for their business. You saw Capital One. They have that Slingshot software that they want to sell. We're helping drive revenue for them there. And that's very common across the board with many of our customers or were foundational to them running their businesses. So very early innings of migrations for our customers.

That helps to set the stage. And again, I just want to kind of open it up, reflecting a little bit on the path I don't want to dwell. But if I go back to Q1, Q1 was an anomalous and maybe not such a good way. Q2, anomalous perhaps or some would say in a positive sense, as you look to the back half of the year relative to Q1 and Q2 and you think about your guidance methodology and, I guess, the precision that you may be have over time and being able to better predict the business, is there anything to call out that we should consider when we think about the back half and the expectations that you've set?

Nothing has changed in our guidance philosophy since we went public. If any of you were on the roadshow calls when we talk to investors, I've been very clear that a 3% to 5% beat is a good beat, and that's what we kind of aim for. Yes, I'd love to beat it by more, but I actually don't want to beat by 10% to 15%. I try to give people meaningful guidance and realistic guidance for the company. Just like Q1, we don't get overly anxious when we're 3% beat, just like I don't get overly excited when we have a 6% beat. These are quarterly things. I'm focused more on the $10 billion and how quickly can we get to $10 billion. I know that's what the whole management team is focused on.

Well, it's good to know that nothing has changed.

Nothing has changed at all.

And it's also good to hear you say $10 billion because we're going to talk more about that as we proceed. But maybe just in terms of business trends and the drivers of Snowflake, one of the very positive things we continue to hear about Snowflake from customers is your early leadership in data sharing and the potential opportunity there, where are customers just in terms of their readiness to really utilize data sharing for analytical processes? And how do you see this creating stickiness for the platform long term?

Well, I would say, I'm going to step back. So when we're going to almost every new customer, that's one of the things we talk about, the ability for data sharing. And that is what gets many people excited to go to Snowflake, but the reality is you first need to get your data into Snowflake and start doing your normal work and then you get into data sharing. Data sharing is probably the furthest along in the financial services. That shouldn't surprise you either because there's so much sharing of data with -- think of all the hedge funds and stuff, all the different data sources where you get money from or think of Fidelity or the banks and how they deal with getting data to their customers. Data sharing is an ideal way to do things in a secured governed way because the custodianship of the data never changes. So it really solves a lot of the privacy security issues there. And by using Snowflake for data sharing, you know exactly who has access to what data to do things. And so that's a pretty meaningful piece for us, and it creates that stickiness. And what we're seeing now is a lot of the new customer wins we're getting is because of some of our Powered by Snowflake use cases within Financial Services are driving new customers to us. So we think it is one of the most meaningful things and a real differentiator for Snowflake is that data sharing capability that we have.

Awesome. I attended summit in June, tons of customer activity and a lot of enthusiasm, a lot of new products or new features, a lot of innovation. 2 in particular that stood out to me, Iceberg, and Unistore, just in significant ways. And I'd love to hear from you which are you more excited about and why?

So they're both pretty exciting, but Unistore where you can be able to process transaction like workloads, think of things to 10 milliseconds. You're not going to get less than that right now, but that really enables a lot of the people to build their applications with the data in the whole native app. But it's not just that Streamlit is an important piece of that. And one of the reasons we bought Streamlit was to accelerate our product road map. We always wanted to make it easier for people to write applications that ties in with Unistore. And I think Apache Iceberg is emerging as the de facto standard for table formats for our largest customers. And this gives customers the ability to run their Snowflake directly against those external tables. We have some of our biggest customers wanting us to get that into GA as soon as possible because they want to start using it in production to do that. And so I'm excited about both of them. But native apps are where the real opportunity is, and that's going to kick in next year. I would say Iceberg tables will be in GA by the end of this year. You didn't talk about Snowpark with Python ability, will be in GA at the end of this year. Unistore's a little bit later, more the first half of next year. And that's when we expect Streamlit will be fully native to Snowflake as well too, to help enable that. That's what is exciting us. Really, the native apps is the thing.

Cool. Look forward to it. Look forward to seeing the impact that it has on the business and hearing more from customers. Just maybe turning to your net retention rate jumping around a bit here, continues to be best-in-class at 171% last quarter, suggesting customers see real value from what are often small initial lands and then scaling up really quickly. How does your expand motion help facilitate the steep ramp in usage we see with many customers?

So first of all, our net revenue -- I just want to level set and everyone to remind you. To go into that cohort for the net revenue retention, you have to be consuming for 2 years and because it's your last 12-month growth over your prior 12-month growth. And what I would say is we believe our net revenue retention rate will remain high for quite some time. Yes, it is going to come down. But that's just a function of so many of our customers are in the early innings of their migration. I don't see that slowing down. It goes back to what I was saying. The average G2K spends $1.2 million today. That is -- if you look at the budgets of these people, that is very small spend. And if we can get the likes of a Capital One that's like a $48 million, $49 million run rate, but they are all in on the cloud. Most of the other banks, the big ones can be much bigger than capital if they went all in with the cloud. Yet to see whether that will happen or not.

Got it. How often do you see clients, Mike, overconsuming versus under consuming their credits on contractual commitments? Can you just remind us of your practice of rolling over unused credits to future contract years? And what trends are you seeing perhaps in terms of customers' ability to forecast their consumption with you? Because I feel like if we reflect on last year, that was the recurring story of, hey, customers are seeing so much benefit. They're deploying even quicker, realizing even more value and they're finding themselves where they're before year-end exhausting through their credits.

Yes. No, good. So I'm going to break it up into 2 things. So Generally, when we do a Cap One with a customer, Cap One is the initial deal on a new customer coming in. It was taking 240 days to get them up to that contracted rate that they were consuming within the first year. Now we've accelerated that with the help of partners and tools, that is now about 210 days to get them fully ramped into production. Generally, customers are consuming 100% within their first year. Yes, you have some customers, during to business reasons or whatever, they were just slower. Priorities changed within the company. It may take them longer and then they have unused credits. The way our contracting works is as long as you renew for an amount equal to or greater than your last annual contract, you can roll those unused credits over. And so generally, we will sign a contract with a customer that's a 3-year contract. And it usually is a commitment of so much in year 1, year 2 ramps, year 3 ramps. At the end, if they have anything left, it would get rolled over in a new contract as long as they're doing an amount equal to or greater. But the reality is, is we do get into negotiations with customers. Unused credits is not a big thing. It's, quite frankly, most customers are consuming before their 3 year kind of our largest customer is a prime example. That is not going to -- is going to run out of credits before that 3-year period. I will say there's generally, every quarter, $3 million or $4 million in expired credits that come into revenue. And it's generally associated with. There are -- believe it or not, there are a lot of small companies that still go bankrupt that you never hear. There are businesses that their business has changed, and they're downsizing what they do and they sell off a division or whatever. But it's not a huge percentage of our revenue that it happens with.

Cool. Helpful commentary. Maybe turning to another topic of conversations related to Snowflake. Your platform enhancements, which you've got a great track record of pushing through over many years as a company. And it sounds like customer feedback on the enhancements from late last year remain very positive. And I know you shared some examples of this at your Investor Day showing some cohort adoption. But can you tell us about demand elasticity and expansion opportunities? You talked about that typically take about 6 months to come to fruition. And how should we think about the impact of rolling out Graviton2 in the back half of the year and the extent to which it's factored into your guidance?

Well, it's fully factored into our guidance, as we said in the beginning of Q1 when we gave -- when we reported on Q4, and it was always planned that, that was going to be in the second half of this year. The reality is software and hardware improvements are a fundamental thing that we will continue to see. And it's good because it improves the price performance for our customers, and we become cheaper for our customers. They move more workloads to us. And as we said in the past, we expect there's a 5% revenue headwind every year. That's how we forecast the company long term for these different performance improvements, whether they be software, and we feel most have come from software or hardware. And at any time, I sit in a meeting every quarter, where I deal with the senior engineering and product management leadership. And there's 50-plus things on that pipeline that are all software improvements they're working on that are going to be rolled out over the next 2 years. The one thing I will say that's so unique about this business unlike an application software business. In an application software business, you can roll out a new feature in a quarter. The things we do are 2- to 3- to 4-year projects we've been working on. Like all these things we're talking about, Unistore, Snowpark, all this, these are things that were started when I -- somewhere before when I joined the company, that they're just coming to market now because we're in a database world. You have to get everything right. There's so much testing that goes into it. So...

And I think it's fair to say that creates a competitive moat that maybe is enjoyed by application companies.

Correct.

Or modeling a business workflow may just be a lot less technologically sophisticated, not unimportant, but...

Yes, we're not naive though too, there is competition out there. And as I said in the past, there's going to be many winners in this. We just think that we have a superior technology, and we think we're a number of years ahead of people. I would say the biggest moat for us though or the real differentiator that creates the stickiness is the data sharing.

Makes a lot of sense.

And by the way, we're the only one doing data sharing the way we're doing it. People talk about data sharing, but they're really not doing the same thing.

Can You double-click on that?

There are some companies out there that talk about data sharing, but they're really transferring the data. We don't transfer the data. we continue to keep that in our Snowflake instance. And we have the security and governance around that.

I was going to say, what are the benefits of security and governance?

Security and governance is the number one thing, but also cost because you're only storing it once, it's a huge benefit.

Makes a lot of sense. You already talked to this a little bit when you talk about the $1.2 million average. But are there any other stats that convince you that Snowflake remains underpenetrated within your installed base? And also, can you maybe offer any sense of what a saturated account looks like if there is such a thing, which I have to imagine, there's always going to be data growth. But what is saturated? What's an average account look like? And how do you really drive home the point for investors what the headroom looks like across the base?

Well, I would have thought our largest customer was a saturated account 2 years ago, and it's kind of gone from $29 million to $48 million, $49 million run rate. And I know there's more opportunity there. So I don't really know what a saturated account looks like. I haven't seen it. I'm not saying it's there. I'm not aware of any that are, I would say, are fully saturated because there's always more use cases. But what kind of gives me the confidence, if you look at what Global 2000 companies are spending a year on hardware and people to manage that hardware and all the different security around that hardware, $1.2 million is nothing. I used to be the CFO of ServiceNow. We ran all of our infrastructure internally for like running SAP and HANA. And when you saw what you would spend a year for your hardware for HANA, this is nothing. And that's what gives me the confidence that they know it's a very small ticket relative to where they can go. And when I look at our 246 customers that are $1 million plus a year on average, there's $3.5 million, there's no reason why Global 2000, I'm not going to say this is going to happen within 6, 7 years, but they could easily spend $10 million a year on average easily.

That makes total sense. One of the concerns about rapid cloud consumption growth within the enterprise that we hear about is in efficiency, over consumption at times in ways that add a questionable business value. How do you work with customers to ensure that their usage of Snowflake is, in fact, optimized for value?

The number one thing we see, when we look at customers where their spend gets out of control quickly, it generally goes back to, they never took the training. I'm serious. And I actually got really upset at our sales people in my last QBR. I'm like, listen, the district managers, we had put in place that you must -- when you're a Cap One, you must buy a training. And why it's cheap, it's not that expensive. But what you want your training is that you actually understand how to use Snowflake properly. And you put in place your own governance because at the end of the day, the customer needs to put the governance in around controlling their usage of Snowflake. And what's happening is the DMs were just allowing -- they have the authority to remove it from the order form. And now training can't be removed unless it goes through deal desk, which is controlled by my organization because of that fact. But we are constantly going into customers. We have, since day 1, this is not a new phenomena or we go into customers and we help them optimize. We put resin architects on site with customers to help them. And a lot of the time, it's understanding how to write their queries efficiently within Snowflake so that it's not wasting a lot of compute cycles to process things, the simple things of that.

Mike, you're one of the more strategic CFOs I've had the pleasure to know and, but you're still CFO. So if it's okay, I want to ask you some finance questions.

You can ask me whatever you want.