Snowflake Inc. (SNOW) Earnings Call Transcript & Summary

Okay. Hey, welcome to our next session. Mike, I'm glad you made it. It's the traffic jam in the one-on-one meetings is what I hear is like terrible.

Yes, I was more trying to get investors out of the room when I finished my last meeting.

Did you -- but you're...

And the thing about Zoom, there's no lingering. You can just shut it off.

Yes, yes, yes. One more question. Yes, yes, one more question. You just reported like really good, solid results last week. Maybe just to get the room kind of all on the same page, like what were the highlights from your...

Really strong free cash flow. I'm happy with the revenue growth. I've been saying since day 1, we try to guide the business to try to have a 3% to 5% beat, I think, it's a good beat. And given the challenges and what's happening in the economy right now, I'm pretty pleased with how the company has performed.

Yes. Yes. Can I mention that, I mean, the one thing where you are surprisingly a little bit is like the when you went back to the olden days, you had like economic turmoil, then customers often became like very inward focused and just kind of said, look, let's keep the lights on and just not change anything. Like what do you see in terms of new customer business?

Really no change. And what you need to understand is new customers are coming to us that they have made the decision they want to be in the cloud. They don't want to continue to manage their data on-prem. There's many of these customers that feel they're behind and want to catch up with their competition. They are also looking at the cost and are understanding the price performance of doing things in the cloud versus on-prem. And you have to understand, too, we don't just find a customer in the quarter and close them. The average customer is 7 months, the average across the board. But large customers are 1 to 2 years to land these customers to just get them to get that first PO to start. And these guys aren't making decisions for the next 3 months, 6 months. These are 10- to 15-year decisions they're making in what they're doing. And most -- when you talk to customers, they are very much focused on the long term. And the beautiful thing about Snowflake is, from an expense standpoint, the expense only hits you as you consume. And that's why with our model, many of our large accounts, our average Global 2000 lands at $100,000. Yes, we've had customers that have landed at $3 million as a CAP 1, we call them, but most land at $100,000. And by the way, when they're doing that, they also typically sign big service contracts with GSIs to do their migrations or us. And I was actually just looking yesterday, our top 15 GSIs year-to-date through October 31 is the data that I had. They actually sold $1.425 billion in services around Snowflake. And those are all customers that are just starting their journey to Snowflake. And that's what gives me the confidence. People can be spending that type of money if they didn't have in their road map and their plans to move to Snowflake.

Yes, yes, Yes. Like what do you -- like they must be kind of training and hiring like on the GSI side as well if you keep up-to-date.

The GSIs themselves are really -- and we spend a lot of time with them on certifying their people to be Snowflake certified. There's different certification levels. I will say, if you went back 3 years ago, we used to hear from customers, one of their biggest concerns was they didn't have people who really understood Snowflake. Today, that's not as big of an issue. We see people within new -- it's funny, you can see when we're trying to sell into a Global 2000. And then you can see through their job postings they have people that are looking for Snowflake talent so kind of tells you we're going to get those deals. But it's getting better right now. We spend a lot of time training both customers, and more importantly, the GSIs. And they're building up significant practices.

Yes. And then like in a way like that lending spot, like $100,000, I mean, it used to give you a lot of comfort to kind of because you have that kind of expansion there. Is there a pattern for you that you see in terms of like if there's a typical guy? Or like can you talk about the journey there?

Every customer is different. And some companies like to start with the easy stuff first. Others, we have one that I know is going to do the hard stuff first. It really depends upon the customer and what their journey is.

And when you say hard stuff, like is that like the classic enterprise data warehouse where everything connects in?

Yes, I've one large financial institution that wants to do their main big Teradata warehouse, but they have hundreds of other data warehouses. But there's one core.

Wow. Yes, yes, yes. I remember like on the diligence calls for the IPO, there was a lot of the guys were first surrounding and then kind of the core was kind of the last step like, okay, so that's interesting. But then the -- like, is that in a way like the explanation for that crazy good dollar net retention as well? And from what you can see, you don't sound like it's slowing down anytime soon.

Yes. No, well, the high net revenue retention is driven by some of these big customers ramping very quickly. And if you look at it, and we said on the call, and I will give you this disclosure every quarter, 6 of our top 10 customers grew faster quarter-over-quarter than the company's growth rate. That tells you. And I did have 3 customers who -- this is actually the first time that sequentially declined quarter-over-quarter. And those are 3 in the technology crypto space. Those 3 customers, actually from when we guided at the beginning of the year, they took out $41.8 million of revenue from us for the full year. These were 3 customers who have gone through some challenging times, but also did some heavy optimization. And by the way, all these 3 customers, we've been telling them for a while, we can help you save money, but they were growing so fast, they didn't pay attention and now customers are paying attention. But I would say those were 3 of our worst in terms of how big they were and we knew there were big savings.

Yes, yes, yes. And then the -- going back to that original question of like people kind of coming to you and having made the decision, it's -- on our end, it's a little bit tough because we get like the noise from everyone. It's like, oh, no, we have a cloud solution. And this one is really good. Like what's the number -- what are the kind of top points that customers say, like, I want to go to Snowflake, and yes, my legacy guys said, I have cloud, but actually I really want to change. Because it's a big decision. It's a lot of work.

It's a lot of work. When we are competing for an on-premise migration, it is always we're competing with Google, Microsoft, AWS tends to partner with us more out of the gate. Google is definitely the most competitor there. Many of the times, we only win in an Azure account when Synapse fails. And I'm not saying there isn't any, but I have been asking my salespeople for a successful implementation of Synapse in a large account, and they can't find one. I have a lot of companies we've heard trying, but generally, we get in there once they fail. I'm sure they must have some, but we can't find any.

Yes. And then...

Google has some successful migrations.

Yes, yes. And then the legacy come up at all like the...

We are never competing with Teradata. When a customer has made the decision to go off-prem, it is never against Teradata. They've made the decision to leave.

Yes, yes, yes. So that's even before. Okay, that's interesting.

And by the way, I've never seen -- I asked our salespeople, too, have you seen anything with Oracle and HeatWave or whatever, and have not seen it once in a competitive situation with any of our accounts.

Okay. Yes, makes sense.

Not I'm saying it doesn't exist, but we just don't see it.

Yes. Okay. No, okay, makes sense. I mean that's what a year in the market as well quite a bit. So it's like -- it's kind of the same. Maybe let's change gear a little bit, it's like consumption models. So you're kind of one of the first to kind of drive that consumption model change. Like where are you on that realization journey of like, okay, this is different. You had ServiceNow. It's nicely seat-based, nicely predictable relatively. Now we're on consumption like you were a few quarters in, like I think this year was the first time where your AI models were not totally perfect anymore. Like where are you in that journey and how happy you are you?

I'd say, I'm pretty pleased with our models and what we've done and where we've had skewing, it's been driven by a couple of customers that have been unique to those customers. I'm comfortable with this model. It took a little bit of time to get used to it, but I actually like it in the level of detail that we have in Snowflake using Snowflake to do our forecasting at a customer. Every individual customer, we have a forecast for that rolls up, and we're using our predictive models. We predict where it's going to be in. We've been pretty accurate from the finance side on where we're going to land in terms of consumption. But I want to stress too, when we start a quarter, we start with a 0 revenue.

Yes, yes, yes.

And like a SaaS business, like I know I was at ServiceNow, I knew pretty much 96.7% of our revenue was in the bag at day 1 of the quarter, unlike a model like a Snowflake consumption model.

And then the -- if you think this year, like remember at the beginning of the year, there was like people were taking holidays. It's like a new input factor in the model. Like is that kind of in a way like you're constantly fine-tuning and...

We constantly fine-tune our model based upon the history. And we have seen, as we've become more of a global company and especially what we have seen, for instance, we sell to a lot of U.S. companies, but they have employees around the world. They have a lot of users in India. And you actually see during the Indian holidays, and there's a lot of holidays in India, I've really noticed this year, that the downtick daily consumption tied into those holidays. And so our models are all, the more history we have, the better we are at forecasting that stuff.

Yes, yes, yes.

And unfortunately, during COVID, it was very different when people were working remotely. People aren't taking holidays when people are sitting at home, they were continuing to work.

And do you think there will be -- I'm asking is like one of the companies later is Mongo, and they kind of started talking about that they're starting to see like more seasonality coming in for the quarters in terms of like there's the Q4 has like the holiday effect in the summer, the Europeans go on holidays, et cetera. Is that something that kind of will eventually kind of come through for you as well?

Well, I do see seasonality in consumption. Clearly, this quarter has a lot of holidays, and around July 4th and then the summertime holidays, we do see that because remember, about -- roughly about 70% of our consumption is done through scheduled jobs. No human interaction, about 30% is human interaction with the system. And you can see that on the holidays. I see it on Saturdays and Sundays how it drops off, but it's saves that, that base roughly 70%.

Yes, yes, yes, because like the machines are doing it. No, that's interesting. I mean like on that note, like in terms of like if you are comfortable with the consumption model, you see all these new clients coming up, like how do you think about like the current uncertain macro environment? Because like the -- in theory, you would think like -- remember, like, you're probably tired of all these investor calls you had over the summer, it's like a consumption model less economic activity, things come down, but you have so many ramping customers that kind of read out such that like how do you feel about those the environment and your goal there?

If I had such a massive market share, I'd be more concerned. We're still very much in the growth phase and the early innings of migrations with customers. And what I would say is what you need to be able to do when you have challenging economic times that you -- may be able to sell on value. And it's not just a cost replacement. It's what's the value you're driving. And data is becoming one of the core assets of most companies today, whether you're a media advertising company or a financial institution, getting real-time data and insights into your business is a pretty important piece to companies. And we're getting data. There's one large oil and gas company. I know we sold them $3 million worth of Snowflake. They have consumed, and they themselves have said they see $30 million in value. My comment was we sold that too cheap.

Yes, yes. And the one thing that surprises me all the time when we have the call back after the quarter is like how much confidence or how much knowledge you have in terms of customers ramping. Like how do you get that? Is it like a customer is telling? Like how do you know like this customer is ramping and next quarter is going to be so much bigger? Like how does that work?

My FP&A team, I have a team of data, small team of data scientists that build the model we reforecast by customer. We kind of go down to the top 200 -- I forget if 280 customers. We actually go and talk to the reps. Does this make sense? What's going on? I sit through a lot of the big accounts. I sit through EPCs, I read, I get -- there's all kinds of deal information I read and what customers are doing. That's what gives me the confidence. But I get a lot of confidence when I started looking a lot more into what people are spending with GSIs. People don't spend that type of money unless they plan on doing something on Snowflake. And I'm digging into who are those big customers, where they are on their journey.

Yes, yes, yes. Okay. So that's interesting, yes. I mean, that should give you a lot of comfort if you kind of see that sort of stuff coming here. Okay.

And that's what we guided to next year.

Yes. Yes. True, yes. Maybe let's shift gear a little bit. Like the one thing that kind of got me excited and surprised is like how much you're changing the world? Like you remember, in the early days, Snowflake was like, "Oh, this is like a data warehouse in the cloud." Now if I look at it, you're changing the world the way how business is conducted. Like if you think about the data sharing, what I'm hearing from other -- from customers and how they're using Snowflake is just like, "oh, shoot, this is a whole new world." Like what are you seeing in terms of that understanding on the customer base in terms of like this is not just a 1, 2, and this is like a much, much bigger thing.

This is fundamentally changing the way that -- well, first of all, it's doing first and foremost, it's eliminating data silos, it's getting all your data in one place. But it's really dealing with a governance issue that you know exactly where your data is, who is accessing the data, and then allows that sharing of data without actually transferring data. And that cuts costs when you're not having to transfer data. And we think, this is our belief, that there will be a world where instead of bringing the data to the applications, bring the applications to the data. And that's why we fundamentally think that Snowflake can become an application development platform where you have all the data without having to move it. Think of a world where you -- because today, what happens, you have transactional databases and then you move all that data into your analytics. There's huge costs associated with moving that data. You can eliminate that cost. There's also a lot of security governance issues with moving that data that you eliminate that. And so we do think, fundamentally, we're going to change the way that people operate. And the whole concept of data sharing is really resonating, especially in the financial services industry, which are very data intensive. And there's all kinds of data sharing that goes on between -- whether it's between a trading platform and the banks or think of the fidelity with all the reporting, they do out to the various other financial services they deal with. And you could do that without actually sending files, it's all data sharing.

Is BlackRock Aladdin in that camp?

BlackRock Aladdin is in there. We're doing something interesting with DTC. They spoke about it, our financial services meeting in New York.

So if you think about it, like, so that you become that -- do you think the -- that will be part of within Snowflake? Or is that just in kind of wherever it is like AWS, et cetera, and then you're just kind of using Snowflake?

It's in Snowflake.

Okay. That would be interesting. Okay. Is that kind of in a way like you mentioned earlier, and I'm surprised you said that AWS sees you more as a partner and less of a RedChip competitor because like they probably have the RedChip like a decent solution, but they want change of volume, yes.

We can operate at scale. We are actually one of AWS' I think we are there now biggest ISV. We are becoming very meaningful to AWS. We just had to reinvent and Frank and me, and they're leaning in heavier on us, and we're looking at renegotiating our contract with them right now. And it's not just about pricing. It's about more commitments from them to work with us. So as I said, AWS pretty much partners with us day 1. They don't try to compete. Yes, they still compete in the smaller accounts with RedChip, and that's a pretty good business for them. But within the large accounts to get all the data in one place, RedChip just can't do that.

Yes, yes, yes. Okay. That's interesting. And then the -- at your Analyst Day, what was it like a few months ago? Yes. Yes, we talked about the new where development projects. And then one of them was striking from me was like the idea of an operational database that would come out in a way that fundamentally then would change the world because like if you think about operational data base in the cloud, the only thing we have is like a MySQL, which is kind of beat and now AWS call it Aurora, but it's MySQL, which is like 30 years old, post-crisis, 30 years old, nothing was built for cloud native. Like is that kind of -- I mean, it sounds like if it works, it's going to be really exciting.

We have been working on this for quite some time, and it's really more with a transactional database within an analytics database all-in-one system. We see it being for more net new app development. I don't think of this as going out and replacing Oracle transactional databases and stuff. It could one day, but that's not what we're doing. We're listening to our customers. That's going to be more applications that are very data-rich and have a lot of data.

Yes, yes, yes. Okay. Yes, that would be exciting. Okay. Shifting gear a little bit. Like the one big surprise last quarter also was like the cash flow comments you made, the commitment to the cash flow margins for next year as well. Can you talk a little bit about the levers that you have as a CFO in terms of like where are we on that gross margin improvement journey, which kind of happened over the last few years in terms of players?

So gross margin, I've said this since day 1, and I'll continue to say this, is never going to have the same gross margin profile as a ServiceNow or a Salesforce. I really don't see it. It may get to 80%, but it's not going to go above 80%. I think we can get into the high 70s. Free cash flow will continue to expand. We really -- but there is seasonality in free cash flow on a quarterly basis. You really need to look at it on an annual basis. We've now guided to 21% free cash flow for the year. And I feel very good about that. And I think you will continue to see free cash flow margin expansion. We are very much focused on growth, but it's not growth at all costs. It has to be efficient growth. I actually just had a 4-hour meeting yesterday with our -- all of our executives who are all hounding that they need more money, I need more money, and it's not unless you can justify how it's going to drive revenue and actually see the payback you're not getting it.

And if you think about like the -- a lot of the margin and cash flow improvement, like in the earlier part was gross margins, like we negotiated the contract with the hyperscalers. I'm sure there's more, like, as you said, like with AWS now. What's the -- what's from you the next leg? It's like basically keep growing, but kind of realizing productivity, et cetera? Or like what are the other factors?

There's still more room in gross margin -- in the gross margins. We still -- we have, I think, 32, 33 deployments around the world. We have a lot of them that are at scale. When you set up a deployment say in AWS, Singapore, we're paying for a certain amount of free pool, we call it. That's the reserve capacity. We're paying day 1 before we have a customer. We have to get to a certain level before that starts to become profitable for us. We have a lot of deployments that are not at scale that will help drive margin up. And as the bigger customers become a bigger percentage of our overall business, that are on business critical, those guys, we have better margin profile on those customers. So that will continue to drive gross margin along with renegotiating with the cloud vendors over time.

Will there also be a mix effect if you have more data sharing because it's only one-time paying for...

Less storage. Storage runs about 10% of our total revenue. I think it works storage is 10%, compute is 89% and egress charges, the data transfer is 1%. That's a pure pass-through. We don't make any margin on that. The storage margins are very low. It's the compute. That's the value of the software we make all of our margin. And then clearly, as we get into these bigger customer relationships, you're going to get a lot of leverage out of sales and marketing. If you can have $50 million-plus customer relationships, those are very, very efficient from a sales and marketing standpoint.

And on that note, like talk a little bit about when you joined, because like the one thing that was interesting at this conference is and now that the times are a bit tougher, I have like so many vendors that are just talking like, oh, yes, we were growing, and we're just getting every customer. And now they are like, oh, s*** some of these customers are actually not really profitable, why they are spending my time on that? Like when you joined Snowflake, and you looked at how they were growing and it looked like everywhere, like how did you change it? And how did that help you kind of on the profitability side?

Well, we are very much focused on large customers. I will say, when we join -- when Frank came on to the business, I'm not going to say they didn't have the large customers, they did, but they had a disproportionate amount of, what I'll say, commercial customers. We are very much focused on the largest companies in the world. And that's why I always tell people, I don't even look at how many customers we have. I look at how many Global 2000, how many Fortune 500, who are the marquee accounts in certain regions, countries, verticals. That's what I'm more concerned about the quality customers, the ones that I know can be $10 million-plus a year in revenue. And so we're very much focused on those large customers. I'm not saying we're ignoring the low end of the market, when I say low end, the SMB. We have a group that focuses on those 500 and less employees in the company. I called out that we saw some weakness in those. And what I want to stress -- those guys are still growing and consuming. They just are not growing at the rate we are forecasting the growing consumption. APJ, definitely, we see some weakness there. They're not declining. They're just not growing at the rate we thought they were going to grow. And a lot of APJ, it's mainly Japan, Korea and Australia, a lot of that is the dollar. The strength of the dollar, weak price in dollars there, it become more expensive for people.

Yes, yes. I mean on that note, like obviously, like you have your competitors and they are like, oh, well, but eventually it's going to get expensive. Like what are you seeing? Like if I look at your net expansion, et cetera, it sounds like it's vendor BS, but like what do you see in terms of like price discussions? Because you are getting quite big ticket items for some of the customers, but the value must be there.

It's price performance. You got to look at price performance. When we actually sit down with customers and look at real data not benchmark data, put actual workloads and do POCs, 9 times out of 10, we are winning in price performance and by a considerable margin.

So the -- so is it in a way like a situation where, yes, you're doing a lot for the customer, which basically means that the bill is high, but like...

The value, you have to look at what the value is you're getting out.

Yes, yes. So you're getting bigger as basically a function of you adding value, not like you're getting overcoming Oracle.

Correct.

Last couple of minutes, how do you think about cash? Because like you're generating cash, you have a very strong cash position. How do we have to think about that? Like I'm not quite sure how much M&A makes sense for you guys at the moment? Like how do you think about that usage of cash?

Yes. We're going to do an M&A, but it's going to be the -- when we look at M&A, it's really 2 things we're looking at. We're looking at can we find a team of engineers that have domain expertise that can help accelerate the development of our core functionality within the company. And we've done some of this, the Applica M&A, and we'll continue to do those. There's also people who have solved an interesting technical problem that was something that was on our road map that we just don't have the DNA. So we're getting both they prove the technology but also good people. Think of that like the Applica acquisition we've done or the Streamlit acquisition we've done. We're going to continue to do those. They're not going to be, Matt, don't think of us doing multibillion-dollar acquisition because anything we do we completely rewrite it in Snowflake. So it's all just one product. At the end of the day, Snowflake is a simple business. We sell compute and there is storage that comes with it.

Yes. And then like -- but what do you do with the money then? Sorry, yes.

So as I said, I'm looking at a number of things right now, it's earning a pretty good interest. But I'm not naive. I've been looking at different things with share buybacks and other things like that, but haven't formalized anything.

I mean, you were always slightly different in terms of like stock-based comp, like dilution we get out from there, like, can you remind us of your philosophy and link?

We've been running at pretty low dilution given our growth. We've been running around 2%. I think this year, it's going to probably be closer to 3%. But longer term, my goal is to keep it at 2%. And clearly, you have a trade-off is do you pay people more cash and less equity or vice versa. And I'm spending a lot of time looking at all of that. But clearly, our cash balances we have -- we had $4.9 billion in the bank at the end of last quarter, and that will continue to grow. While we've been doing M&A, we have done a quasi-buyback in terms of we now do net settlement on RSUs with people.

Do you see the employees getting kind of other investors that they kind of say, look, at this share price I want more stock? Or is it actually, the other way is like, can I have more cash?

You know what I would say now, it depends upon the country and where you are, in certain countries, they don't value the equity in general. They don't value equity as much as they value cash. And certainly, I am hearing from people in the U.S. and some of the bigger markets, too, that they're more concerned about their mortgage payments and stuff they need cash versus equity. And so looking at all of that.

Okay. Perfect. 16 seconds, and I'm a German, so I have to finish on time.

You didn't allow anyone to ask any questions.

Well, that's why we booked you up with one-on-one meeting, so I apologize. All right. Thank you. Mike, good to see you here.

Thank you, everyone. Thank you, everyone. Thank you, Raimo.

Good to see you again.